Column: For a better trade balance

Written by Biswajit Dhar | Updated: Apr 21 2014, 09:13am hrs
The key feature of Indias merchandise trade during 2013-14, the summary of which was unveiled last week, was the remarkable decline in the deficit. From a level of $190 billion in 2012-13, deficit in the goods trade was down to nearly $139 million, a decline of over $51 billion. This narrowing of the trade deficit was only slightly less dramatic than the stupendous increase witnessed in 2011-12, when the trade deficit had expanded by $66 billion. As a result of this decline, merchandise trade deficit, which was hovering around an all time high of nearly 11% of GDP in 2012-13, is expected to be a touch over 8% in the last fiscal. Since the widening of the trade deficit was the most significant cause of the bulge in the CAD, the improvement on the merchandise trade balance in 2013-14 could give the finance ministry a few more options to play with.

However, the feel-good factor regarding the trade performance in the previous fiscal hardly extends beyond the lowering of the deficit. The reduction in trade deficit has been caused largely by the lowering of imports by 8.1% as compared to 2012-13. Exports have expanded, but by a modest 4%. The more disconcerting aspect of the export performance is that after having expanded by double-digits in the second quarter of the year (as compared with the corresponding period in 2012-13), export growth not only fell away in the second half, the two closing months of the previous financial year witnessed negative growth rates.

This performance on the export front marks a culmination of a phase in which much was expected from the exporters, but little was delivered. Following the adoption of the Foreign Trade Policy 2009-14, the commerce ministry had developed a Strategy for Doubling Exports in the Next Three Years (2011-12 to 2013-14). The focus of this strategy was to push exports closer to the $500 billion mark by 2013-14, a level which would help in keeping the ratio of trade deficit to GDP to below 10%. There was little that one could fault with this strategy, for it envisaged export push to come on the back of a strong performance from the critical industrial sectors, particularly the engineering and the chemical industries. However, with the industrial sectors not taking-off as stated in the strategy paper, the commerce ministry had a fresh look at the export targets less than a year back. According to the new projections, exports were expected to increase to $325 billion in 2013-14, but even this significantly reduced target could not be realised.

The failure to meet the export target is not the only concern. Perhaps, the larger concern is the failure to make the manufacturing sectors the prime movers of Indias export push. During the past several years, the composition of Indias export basket has remained stubbornly rigid. The shares of engineering goods and chemicals have been hovering around 20% and 13-14% respectively, while two products groups, viz., POL and gems and jewellery have consistently accounted for nearly a third of Indias exports. If available trends on exports of principal commodities for 2013-14 are any indication, the composition of exports is likely to follow the patterns seen in the past few years.

In recent years, spurt in gold imports was one of the main reasons for the rising import bill. After taking several hesitant steps to curb the ever-increasing lust for the yellow metal in the country, the government adopted two sets of measures to rein in gold imports during the last fiscal after the CAD reached alarming levels. The first was an increase in the import duty on gold from 8% to 10%. The second was a ruling that gold could be imported only by 10 designated banks and other agencies and entities. These designated institutions were required to fulfil the so-called 80:20 ruleat least one-fifth of every lot of import of gold imported to the country was to be exclusively made available for the purpose of exports and the balance for domestic use. Imports of the next lot of gold by the designated entity would be permitted by the customs authorities only after the quantity earmarked for exports (20% of the imported lot) was released to the exporters against their undertaking to fulfil the commitments within the stipulated time.

Available data on imports suggest that these policies have had immediate impact on the imports of gold. Till February 2014, the value of gold imports during fiscal 2013-14 was just above $26 billion, a decline of nearly 48% from the level of imports recorded during the corresponding period in the preceding fiscal. Interestingly, the clampdown on gold imports affected countries that have relatively small market shares in India. Although the two largest sources of Indias gold imports, Switzerland and UAE, witnessed a decline in absolute terms, their shares in the total imports had in fact increased; for the former, the increase was from around 55% in 2012-13 to over 58% in 2013-14, while the latter increased its share to nearly 20%.

There are however, serious doubts about the effectiveness of the gold import restrictions imposed by the government. A recent report by the World Gold Council has observed that the underlying level of demand among Indian consumers had remained robust during 2013.This report concludes that the sharp decline in the official import of gold into India led to an increasing amount of this demand being met by gold imported through unofficial channels (read smuggling). The report has given credence to the generally accepted view that the gold import restrictions can hardly prevent outgo of foreign exchange from the country, since they bring the hawala traders into play. Clearly, measures for restricting gold imports that are currently in place are not helping the country to ride over its external payments problems. The government therefore needs to think in terms of a more comprehensive policy that looks at ways of reducing the demand for gold on the one hand, and provides effective mechanisms to check smuggling of gold.

Besides gold, the other major contribution to the lowering of the import bill in 2013-14 was made by the sagging imports of machinery and transport equipment. These figures point to two worrying signs: one, manufacturing sector continues to go downhill and, two, the investment climate has become rather sluggish.

The author is director general, Research and Information System for Developing Countries (RIS), New Delhi