There is a positive correlation between non-oil, non-gold (NONG) imports and consumption and, in fact, growth in NONG has remained significantly high as compared to the rise in consumption.
By Richa Gupta Umang Aggarwal
The Indian economy appears set to be the fastest growing economy in the world again in FY18-19. Similarly, the outlook for global growth is also positive for 2018 and 2019. However, despite global buoyancy and rupee weakening, export activity has remained largely volatile. During the same period, inward shipments have seen a significant rise. The widening space between imports and exports has inflated our trade deficit to ~$17 billion as of October 2018, compared to $14.6 billion in the year ago period.
In this backdrop, analysing the trend in non-oil, non-gold (NONG) imports—a proxy for domestic demand—can provide insights on where the economy may be headed. The imports, ex-oil and gold, have continued to show a sustained double digit rise since March 2017, excluding some outliers. Generally, a rise in imports is taken to be an indicator of revival of consumption demand which augurs well for economic growth.
However, are imports rising because domestic manufacturing has not been able to respond completely to domestic demand on the back of capacity constraints (continued substitution of domestic industries) or has there been a more permanent substitution of foreign industries which could imply efficiency issues within the domestic manufacturing base?
While the sustained uptick in NONG imports is a positive sign for consumption demand, it is important to analyse whether the rise in NONG imports is followed or accompanied by an increase in production prints. If the data suggests otherwise, then this may be a more worrisome situation reflecting a possible displacement of domestic manufacturing units with foreign substitutes.
Imports saw a reversal around the time of demonetisation in November 2016 but really picked up beginning March of 2017, recording a strong double-digit growth through a better part of the year. There is a positive correlation between NONG imports and consumption and, in fact, growth in NONG has remained significantly high as compared to the rise in consumption.
NONG imports have largely increased across capital goods, raw materials and consumer goods, and have done so since November 2016. But the domestic manufacturing (as can be seen from the IIP data) has started showing signs of recovery only since September 2017 and a part of this increase may be attributed to the base effect.
A similar trend in production numbers has also been depicted in GDP (manufacturing) growth wherein the recent increases have partly come due to favourable base effects. Within IIP, the rise in capital goods production, while positive, has not moved in tandem with the demand seen through NONG imports. It is suggestive that the period immediately after demonetisation shows a more marked difference in imports and domestic production data. The interesting trend that would need to be seen is whether the recovery in manufacturing sustains.
If not, then it can be argued that the imports are feeding the reviving consumer demand that domestic manufacturing activity is unable to fulfil. This, then, may imply a scenario of a moderate manufacturing output combined with a higher non-oil import bill.
Overall, it is important to continue to analyse data on imports, consumption and production because, as of now, a part of the rise in imports have come through consumption increases, and if imports and production are not increasing in tandem, then growing imports may indicate that domestic manufacturing is unable to take advantage of revival of consumption demand.
Generally, such a weakness may be attributed to inherent capacity limitations, infrastructure bottlenecks, resource crunches, and a lack of technical know-how. The specific causes would need to be identified based on a sectoral analysis. Such an analysis will provide policy direction for enhancing domestic production in specific sectors, where imports are high
Gupta is a senior economist and senior director and Aggarwal is an economist with Deloitte, India.