BackViews | The trade deficit and India’s weakening energy security
Views | The trade deficit and India’s weakening energy security
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The trade data for fiscal year 2012 released by the government on Thursday shows that reliance on foreign energy sources is growing, even as other countries such as the US and China are trying hard to improve energy security.
There are no quick solutions. The US is moving closer to energy security thanks to its success in developing new technologies to develop shale gas fields as well as its conscious moves to increase sourcing from countries in its region. The Indian government is also aware of the long-term challenges, including getting more investments into the hydrocarbons sector.
But the current policy mess is not helping. The inability to raise domestic fuel prices only acts as an incentive to increase consumption of hydrocarbon products, most of which are imported. The inefficiency at Coal India as well as the difficulties in getting green clearances for new coal mines is forcing domestic power companies to buy from abroad.
Another big contributor to the record trade deficit has been bullion. Indians spent $61.5 billion last year to buy imported gold and silver. The growing role of bullion in investor portfolios is partly because hard assets have been better hedges against high inflation, compared to financial assets such as bank deposits. It would be far better to tackle the gold bug through financial sector reforms rather than import taxes which will create arbitrage opportunities for smugglers.
The large trade deficit is a clear risk factor for the Indian economy as a whole, which is why the rupee was trading at a three-month low by Friday afternoon. However, there is a subtext as well. Hidden in the trade data are indications of two important policy failures: in energy and the financial sector.
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