The external sector imbalance

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: The Icrier team was invited this year by the India International Centre to present its Mid Year Review of The Economy. The importance of this Review, as reflected in the attendance, has clearly declined since Dr Malcolm Adeshesiah’s time. Though understandable, this is regrettable simply because there is no substitute for such a discussion within a large informed group for advancing one’s understanding. Still, the Review gave us an opportunity to place the Indian economic scene in a global context. With more than 50% of our GDP, up from 19% in 1991, now being accounted for by external sector transactions (merchandise trade plus invisible payments and receipts), it is indeed time that all our policy formulation, including the Five Year Plans, should be firmly located in the global context. Unfortunately, this is not yet the case.

As part of the global context, we made a few inevitable comparisons with China. One well known feature that is nevertheless worth emphasising is the rather sharp difference in the contribution of net exports to GDP growth. In China, this has increased from 6.2% during 1993-2000 to 7.5% during 2001-2005. In India’s case, the contribution of net exports was a negative 2.5% during 1993-2000, which increased to (-) 4.9% during 2001-07. In other words, the mix of our policies and performance, in net terms, is generating employment and capacity expansion in other countries to meet domestic demand!

This would be fine if our domestic savings were weak and stagnating, but with savings now on a sharply rising trend and absorption of capital flows becoming increasing costly, it is time that policy attention be even more sharply focused on achieving a net export surplus and making external demand an impetus for growth. Given that our exports have so far been relatively labour intensive, this external demand based growth will also generate more employment and be more inclusive.