EDITORIALS & ARTICLES

Excess imports, sluggish exports — makes India’s current account deficit more challenging.

  • Current account balance is essentially the difference between what a country pays and what it is paid in exchange for goods and services. A country is said to be facing a current account deficit when its import bill is higher than its export bill, and is said to be in surplus when its exports exceed imports.
  • According to Reserve Bank of India’s (RBI) data on Balance of Payments, CAD climbed to Rs 1.8 lakh crore by the quarter ending June 2022 — the highest in the past decade in absolute terms, and comparable only to the third quarter of FY 2012-13 when it had surged to Rs 1.7 lakh crore or 6.75 per cent of India’s GDP in that quarter.
  • This time though, the deficit is higher in absolute terms, nearly half in terms of percentage of GDP.

Trade deficit & China

  • A good look at the current account — inflow and outflow of goods, services and remittances earned or paid by a country — shows that a majority of India’sdeficit can be attributed to a negative balance in the merchandise account. India usually runs a surplus in services and remittances, but incurs a deficit in trade of merchandise or tangible goods.
  • In the first three months of FY 2022-23, India’s trade deficit — excess of imports over exports of merchandise — was aboutUSD 68 billion. This deficit was somewhat mitigated by export of services which reported a surplus of USD 31 billion, besides secondary incomes amounting to USD 22.9 billion, comprising mostly remittances from abroad.
  • Data from the Ministry of Commerce and Industry shows that by the second quarter of FY 2022-23, India’s trade deficit almost doubled, compared to the same quarter in the previous year.
  • In the first two quarters of FY 2021-22, India reported a trade deficit of USD 76 billion, which jumped to USD 148 billion in the first two quarters of FY 2022-23.
  • This was because India’s imports rose by 38.5 per cent and exports by only 17 per cent in the first two quarters of the current fiscal year. At the same time, the surplus earned by services rose only by 19 per cent (from USD 51.4 billion to USD 61.3 billion) — not enough to compensate for the extra dollars spent in footing the bill for merchandise imports.
  • A large chunk of this deficit can be attributed to trade with China, which experts find concerning.
  • “A disaggregated view of India’s trade shows that the deficit from China contributed almost 40 per cent of the overall merchandise trade deficit in 2021-22,” said Radhika Pandey, a senior fellow at the Delhi-based National Institute of Public Finance and Policy. “Dependence on a single country for a large part of imports is a cause of concern. The deficit owing to trade with China shot up from USD 38 billion in 2020-21 to USD 73 billion in 2021-22.”

Surging Current Account Deficit: Need to increase Exports

  • India has reached USD 418 billion dollars of manufacturing exports in the fiscal year 2022 (FY22)with rapid growth over the last 2 years. Despite having the fifth-largest economy in the world, contributing to 3.1% of the GDP, India’s export contribution to global trade is still only 1.6% that includes a variety of factors like rising protectionism and deglobalisation, lack of basic infrastructure and low market penetration in high-income countries.
  • Therefore, it calls India to look forward towards expediting Free Trade Agreements, lowering tariffsand addressing supply-side bottlenecks would help in addressing export challenges.

Major Sectors that Contribute to Indian Exports

  • Petroleum Products:It contributed in a major way to India''s exports, amidst crude oil prices rising due to the pandemic and made worse by geopolitical tensions due to the Russia- Ukraine war.
    • India exports USD 55.5 bn worth of petroleum products, a massive rise of 150% over last year.
  • Engineering Goods:They registered a 50% growth in exports, at USD 101 bn in FY22. Currently, all pumps, tools, carbides, air compressors, engines, and generators manufacturing MNC companies in India are trading at all-time highs and shifting more production units to India.
  • Jewellery:Made up USD 35.3 billion of India''s exports in With the reduction of import duty on cut and polished diamonds in this year''s budget, this is only going to rise.
  • Agriculture Products:Agricultural exports were buoyed by the government''s push to meet global demand for food amid the pandemic. India exports rice worth USD 9.65 bn, the highest among agricultural commodities.
  • Textile and Apparels:India’s textile and apparel exports (including handicrafts) stood at USD 44.4 billion in FY22, a 41% increase on a YoY basis.
    • Government’s schemes likeScheme for Integrated Textile Parks (SITP) and Mega Integrated Textile Region and Apparel (MITRA) Park scheme are giving a strong boost to this sector.
  • Pharmaceuticals and Drugs:India is the third-largest producer of medicines by volume and the biggest supplier of generic drugs.
    • India supplies over 50% of Africa’s requirement for generics,around 40% of generic demand in the US and 25% of all medicine in the UK.

Challenges Related to Indian Export Growth

  • Rising Protectionism and Deglobalisation:Countries around the globe are moving towards protectionist trade policies due to disrupted global political order (Russia-Ukraine War) and weaponization of supply chain, that is in way shrinking India’s export capacities.
  • Lack of Basic Infrastructure: India’s manufacturing sector lacks sufficientmanufacturing hubs, internet facilities and transportation are costly when compared to developed nations which is a huge deterrence to Industries.
    • Uninterrupted power supplyis another challenge.
  • Lack of Innovation Due to Low Spending On R&D:Currently, India spends about 0.7% of GDP on research and development. This prevents the manufacturing sector from evolving, innovating and growing.
  • Specialisation versus Diversification:Indian exports are characterised by high diversification combined with low specialisation, implying that India''s exports are spread thin over many products and partners, resulting in lack of competitiveness compared to other countries.

Looking ahead

  • Exploring Joint Development Programmes:Amidst a wave of deglobalisation and slowing growth, exports cannot be the sole engine of growth. India can also explore joint development programmes with other countries in sectors like space, semiconductor, solar energy to improve India’s medium-term growth prospects.
  • Dedicated Export Corridors:The economic policy should also strive to promote export dynamism and product specialisation alongside product diversification through Dedicated Export Corridors to offer the best of the best service across the globe and propel the Indian economy to the path of long term sustained economic growth.
  • Promoting Acquisitions Abroad:Indian entrepreneurs can be incentivised to sign joint venture undertakings abroad for building up an export potential for their products especially in developing countries where there is a favourable political climate and a demand for Indian products.
  • Frontlining MSME Sector:MSMEs account for 29% of GDP and 40% of international trade, making them key players in achieving ambitious export targets.
    • It is important for India to link Special Economic Zones with the MSME sectorand incentivize small businesses.
  • Filling Up Infrastructural Gaps:A robust infrastructure network - warehouses, ports, testing labs, certification centres, etc. will help Indian exporters compete in the global market.
    • It also needs to adoptmodern trade practices that can be implemented through the digitisation of export processes. This will save both time and cost.






POSTED ON 19-12-2022 BY ADMIN
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