Proactive steps needed to fix trade imbalance

Written by Biswajit Dhar | Updated: Dec 31 2011, 05:38am hrs
Indias trade sector has been in focus for the past few months for a host of reasons. Among them was the news of a spectacular growth in exports during the previous fiscal, one that helped the total for the year exceed $200 billion for the first time. This performance was the result of the fact that the past few years have been witnessing a change in the export destinations. The dependence on the traditional markets, such as Europe and US, has been declining. This trend has got accentuated since the onset of the economic downturn.

The share of Indias exports to these regions has declined by almost 3-4 percentage points over the levels in the immediate pre-crisis period. At the same time, regions that have provided the impetus for global recovery in particular, the Asian region now account for nearly 55% of Indias exports in the first nine months of the previous financial year. This increase was caused primarily because of the rapidly rising share of two countries, UAE and China. While the former has emerged as Indias largest export destination since 2008-09 and ended the last fiscal with a 13.7% share, the latters share in Indias exports was nearly 8% in 2010-11, up from about 5% in 2008-09.

The export numbers caught the eye once again in the first few months of the current fiscal when the Directorate General of Commercial Intelligence and Statistics (DGCI&S) the custodians of data on the countrys merchandise trade reported that export growth had accelerated further. DGCI&S reported that in the first five months of 2011-12, exports increased more than 54% over the corresponding period of 2010-11. Within this period, two months stand out: In July, exports grew by nearly 82% against the same month in the previous year, while in May, the year-on-year increase reported was 57%. These numbers instantly came under intense scrutiny, largely because they came at a time when the global economy had already started showing signs of weakness.

Almost on cue, exports started showing signs of weakness and, in the more recent months, exports are showing worrisome signs. Between August and October 2011, exports have declined consistently the level of exports in October 2011 was almost a third lower than that recorded in July 2011. What should make the government sit up and look at these numbers more seriously is that the decline has come during a phase when the rupee had depreciated more than 11% vis--vis the US dollar.

But, while exports have declined, the import trend line for the year is showing an upward trend. Imports have registered the sharpest increase during October 2011, the most recent month for which data are available from DGCI&S. It is hardly surprising, therefore, that the available monthly statistics for merchandise trade indicate a considerable worsening of the trade balance since the beginning of the year. Trade deficit during April to October in 2011 was more than 9% larger than that recorded in the corresponding period in the previous fiscal.

Sagging exports and a burgeoning trade imbalance are among the most disconcerting elements of a grossly underperforming foreign trade sector during 2011-12. With the import bill likely to increase as the rupee continues to remain weak, the government needs to devise a well thought-out strategy for injecting greater efficiency in the economy. In the past, situations such as the one being seen at present have prompted the government to focus on measures to clamp down on imports, but this temptation should be abhorred, for it forecloses possibilities of devising proactive policies that would have advantages for the economy in the long run.

The author is director general, Research and Information System for Developing Countries