– By Chinmay Joshi
The international trade among countries and economic growth are inseparable and intertwined with each other. Historically, the importance of trade can be traced back during the times of Han dynasty in China or the Roman empire which reaped significant gains in maintaining peaceful relations among nations, attaining higher efficiency in capacity building and promoting economic development (WTO).
The global growth recovery is expected to be steady and resilient in the upcoming period amidst several risks emanating from rising geopolitical tensions in terms of wars between Russia-Ukraine in Eastern Europe and Hamas-Israel in the Persian Gulf region; tight monetary conditions as a response to elevated level of inflation; supply chain disruptions; rising public debt levels and extreme weather conditions among others. The World Economic Outlook (WEO) January Update 2024 released by the International Monetary Fund (IMF), estimated an encouraging trend in the real GDP growth to 3.1% in 2024 and 3.2% in 2025 from 3.1% in 2023. Similarly, the recently released Global Trade Outlook and Statistics (GTOS) April 2024 by the World Trade Organisation (WTO) predicted an increase in growth rate of world merchandise trade volume from -1.2% in 2023 to 2.6% and 3.3% in 2024 and 2025 respectively despite several impediments to the world trade. In this context, it is important to note that the volume of merchandise trade growth was more than twice of real GDP growth in the 1990s whereas in the early 2000s, the volume of trade growth was around 1.5 times the growth rate of real GDP. The growth in commerce and real GDP roughly recorded the same rate on an average notwithstanding several regional conflicts and economic challenges since the 2010s (GTOS, April 2004). This underscores the close association between the trade among countries and the economic growth.
In the Indian context, as per the Second Advanced Estimate (SAE), released by the National Statistical Office (NSO) of MOSPI, GoI, the Indian economy is expected to post a robust economic growth. The annual growth rate of the GDP in real terms is estimated to increase from 7.0% in 2022-23 to 7.6% in 2023-24. Similarly, the quarterly growth rates are also estimated to be at 8.2% in Q1, 8.1% in Q2 and 8.4% in Q3 of 2023-24. However, it is to be noted that, in the upcoming period, due to several exogenous and endogenous factors, the growth momentum is expected to moderate. The resolution of the recently concluded monetary policy committee (MPC) meeting of Reserve Bank of India (RBI) on April 05, 2024 also projected a moderation in real GDP growth to 7.0% in 2024-25.
The estimated GDP growth in 2023-24 is characterised by the double-digit growth in manufacturing sector (11.6% in Q3 on Y-o-Y basis) followed by the construction sector (9.5% in Q3 on Y-o-Y basis) from the supply side and robust growth in investment reflected in terms of rising Gross Fixed Capital Formation (GFCF) from 8.49% in Q1 to 11.63% in Q2 and 10.58% in Q3 of 2023-24 on the demand side. However, the growth in the consumption demand remained subdued which is reflected in terms of declining Private Final Consumption Expenditure (PFCE) to 3.51% in Q3 of 2023-24 as compared to 5.31% in Q1 of 2023-24. Additionally, despite the strong expected growth in the overall GDP, the share of PFCE as a percent of GDP declined from 61.3% in Q3 of 2022-23 to 58.6% in Q3 of 2023-24. A declining trend can also be observed in the agriculture sector which is expected to slow down from 5.2% in Q3 of 2022-23 to -0.8% in Q3 of 2023-24.
Apart from that, the net exports (NX) which is the difference between the value of total exports and the value of total imports in traditional Keynesian sense is an important component of the demand side GDP growth in India, as exports have huge potential to create employment opportunities in the country and thereby supporting the objective of economic development. As per the SAE, a positive trend can be observed in the exports on Y-o-Y basis in 2023-24 however, imports remained at the elevated levels despite the softening of international energy prices yielding a marginal gain arising out of rise in exports. Besides, the share of exports in the real GDP declined from 23.3% in Q3 of 2022-23 to 22.2% in Q3 of 2023-24. On the other hand, there has been a steady rise in the share of imports in the GDP in 2023-24 as compared to the previous year. Similarly, across quarters of 2023-24, there has been a more than proportionate rise in the share of imports in the real GDP vis-à-vis the share of exports. This suggests a greater attention is needed to be paid for promoting exports and reducing import dependence in order to offset the ill effects of high levels of imports which will be manifested in terms of rising trade and current account deficit.
Against this backdrop, it is essential to address the precarious conditions effectively and efficiently emerging out of certain parts of the world on which India is heavily dependent for its energy needs. The problems emanating from widening conflict in the middle east region encompassing surrounding regional powers have a huge potential to worsen the critical situation of India’s external trade. The imminent threat will be manifested in terms of oil price shocks as a result of the highly volatile situation in the middle east region which is one of the largest sources of crude oil and other energy products for India. The crude oil prices have increased from around 75$ per barrel at the start of 2024 to around 92$ per barrel in mid-April 2024 as a result of the possibility of opening of another war front between Iran and Israel. Also, this region is particularly important in world trade as trade routes through the Red Sea and the Suez Canal handle around 15% and 12% of international trade respectively (GTOS, April 2004).
In order to boost India’s exports, it is important to consider the elasticity of demand for its product abroad. There is a need to improve the quality and standard of domestic products in order to withstand the global competition. The availability of easy credit; ensuring effective marketing support for the products abroad; Production Linked Incentive (PLI) schemes in targeted sectors; signing new Free Trade Agreements (FTAs) ensuring favourable terms with various countries; negotiating effectively on the international trade platforms such as WTO and with various other trade blocs along with effective implementation of various measures announced in the new foreign trade policy will be helpful in augmenting Indian exports.
Similarly, it is also important to find alternative cheap energy sources, reduce energy dependence on imported energy products and explore new indigenous resources of energy products so that India’s burgeoning import bill can be contained. This will further lead to reducing the strain on the trade deficit and consequently the current account deficit. The building up of crude oil strategic storage will certainly prove to be helpful in mitigating the risks arising out of supply chain disruptions and sudden rise in the oil prices.
The international trade and commerce face several risks arising out of geo-political challenges, increasing protectionism, inimical trade environment and policy ambiguities among others. In these pressing times, India must ensure that the negative consequences arising out of these threats are minimised in order to achieve its ambitious trade objectives.
(Chinmay Joshi is the Research Associate, Finance and Economics, at Bhavan’s SPJIMR, Mumbai.)
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