The BJP government inherited an external sector whose problems seemed to be on the wane. The current account deficit (CAD), which had reached unacceptable levels in FY13, had eased considerably in FY14 as the balance on the merchandise trade account saw a significant improvement, of more than 27%. This was achieved through a combination of modest increase in exports and a squeeze in the import bill, the latter being more noteworthy given the immediate past trend. As in the case of most other sectors of the Indian economy, the expectation was that the present government would be able to engineer a sustained improvement in the merchandise trade balance by making the necessary interventions. Realisation of this objective would have been a significant step forward for the macroeconomic stability of the Indian economy, and therefore the performance of the external sector during the first eight months of FY15 assumes considerable importance.
The improvement that the merchandise trade account has seen in the previous fiscal continued into the first quarter of FY15, as the trade deficit declined by nearly a third over the corresponding period in FY14. There was plenty to cheer about as exports increased by more than 7%, while imports had declined by 6%. The better news was that export growth was fuelled by strong performance by the manufacturing sector. Machinery and transport equipment groups were among the top performers: the latter group, having a 9% share in total exports, increased by nearly 34%, and the former, accounting for 6% of exports, expanded by nearly 20%. Textiles and allied products, a group with 12% share in exports, increased by 14%. This expansion was fuelled by impressive export growth in the apparel sub-group and cotton fabrics, which for long were India’s areas of strength, but have since lost their competiveness. For once, it did seem that the India’s manufacturing sector was getting rid of its frailties and was beginning to find its place in the global markets.
On the import-side, the two largest groups, crude petroleum and gems and jewellery, having a combined share of 38% of total imports, registered steep falls. Import of gold had declined by nearly 57%, as the decision of the previous government to restrict its import continued to show positive results. The UPA government had clamped down on gold imports by adopting two sets of measures. The first was an increase in the import duty, from 8% to 10%. The second was a ruling that only 10 designated banks and other agencies and entities could import gold. These designated institutions had to meet the 80:20 rule, which was that at least one-fifth of every lot of gold imports had to be made available for exports and the balance for domestic use.
However, at the end of the second quarter, India’s export growth had started showing signs of moderation. In overall terms, exports grew by less than 5% in the first half of FY15 as compared to the corresponding period in the previous year. Although the exports of major manufacturing sectors continued to grow at a fair pace, all of them, barring the machinery sector, had begun recording slower increases during the second quarter. On the other hand, imports, which till then were lower than the levels recorded in FY14, had also started increasing. One
of the contributors was the import of gold, which had recovered from the steep fall it had registered in the first quarter and was therefore influencing the overall levels of imports. Further, import of crude petroleum had declined by a smaller proportion as compared to that in the first quarter, despite fact that the crude prices had started declining during these months. But despite these developments, the trade balance for the first half of the current fiscal remained below that registered in the corresponding period of the previous fiscal.
Merchandise trade underwent major changes in the two months in the third quarter for which data are available. Trade balance between April and November had mounted and was nearly 4% higher than the same period in the previous year and this had occurred primarily on account of the upswing in imports. As compared to the negative or marginal growth during the first two quarters of FY15, imports have seen an increase by almost 5%. The two largest components of imports after petroleum, namely electronics goods and gold, which together make up for more than 15.5% of India’s imports, triggered the import growth. Gold imports surged as the government gave strong signals of easing the restrictions imposed by the UPA government, culminating in the eventual removal of these restrictions, including the 80:20 rule. While in the first half of the current fiscal, the value of gold imported into India was $14.6 billion, in the next two months, the imports were nearly $10 billion. In November 2014, gold imports were nearly six times higher than the corresponding month in 2013.
All this has happened while the export growth has remained flat. While two of the important manufacturing sectors, engineering goods and apparels, continued to grow, a few other sectors, like electronics and cotton yarn failed to increase their exports. In the recent months, the slump in the exports of petroleum products has of course been the single largest factor for the export slow-down. There is no doubt that the large dependence on this sector is beginning to hurt the export earnings as the oil market becomes increasingly bearish.
With the deficit on the merchandise trade account getting back to its familiar upward curve, the government needs to take some urgent steps to prevent the deficit from going out of control. In this context, it must be said that the removal of controls over the import of gold has not been a very prudent step, for this may widen the trade deficit more than the government has been hoping for.
A much bigger area of concern for the government is the moderation of export growth after a relatively promising start to the year. There are still some signs that some of the major manufacturing sectors can perform reasonably well in the global markets and it is therefore necessary for the government, together with the private sector, to evolve strategies for sustaining the export growth. This is one area that needs an effective public-private partnership; hopefully, the two sides can put this partnership in place at the earliest.
The author is Professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU