Electronic items are weighing heavily on India’s trade deficit. Relentlessly rising imports of electronic items, especially mobile phones, at a time when crude oil prices are firmer, pose a risk to the country’s current account deficit (CAD).
In January 2017, India’s net electronic imports increased 12% compared to a year ago. The chart alongside shows the annualized electronic goods deficit touched $50 billion for April-December. That is as much as 30% higher on a year-on-year basis.
In fact, the magnitude of the impact this variable can have on overall trade deficit has risen over time. For perspective, “Electronic goods deficit is now very close to 9MFY18 annualised oil deficit of $64 billion," pointed out Edelweiss Securities Ltd in a report on 28 February, adding that the category accounts for 25% of the trade deficit widening during the period.
“Even in terms of size, its importance in determining the direction of overall trade deficit has increased multi-fold - now accounts for ~33% of trade deficit (vs. 10-12% five years back)," said the brokerage firm.
What’s more, many expect the trend to persist in the near-to-medium term, considering that rising income levels will ensure reasonable demand for discretionary electronic products. In an attempt to curb these imports, the government recently increased/imposed import duties on several electronic items including mobile phones and related accessories, televisions, smartwatches, etc.
How helpful will this be?
Not much, say analysts. “Electronic items have a snob value and consumers largely tend to be brand conscious," says Madan Sabnavis, chief economist at CARE Ratings Ltd. “I don’t think imposing duties will make a major difference except at the margin where low income group demand is concerned."
From a long-term perspective, improving competitiveness is a crucial factor that can bring about a meaningful change. According to Gaurav Kapur, chief economist at IndusInd Bank Ltd, “A flexible rupee too, has to be a part of the strategy, which would weaken in response to higher trade deficit and help narrow it."
However, the scenario is far from rosy. “Despite several efforts by policymakers, the competitiveness of the manufacturing sector still remains a concern," says Upasna Bhardwaj, an economist at Kotak Mahindra Bank. “While the ease of doing business in India has improved manifold in the past few years, structural bottlenecks in terms of land acquisition, project approvals, labour issues and adequate financing still persist."
These factors could well make it challenging to achieve the country’s target of becoming “net zero imports" in electronics by 2020. Moreover, it’s worth noting that since most of the imported electronics are used for consumption, they don’t contribute much to the country’s investment growth.
This also comes at a time when exports aren’t picking up and the dismal export growth compounds the problem.
Kapur’s CAD target for this fiscal year is 2.2% of GDP (gross domestic product), which he expects should increase to 2.6% of GDP next fiscal year. This is on the back of higher oil prices and the expectation that a pickup in economic growth momentum will lead to higher non-oil and non-gold imports.