The third chapter of this year’s Economic Survey presents a view of the country’s external sector over the last year. Since economic activity revived, international trade also bounced back. The IMF and the WTO both predicted that globals trade would increase by 9.7% in 2021 before moderating to around 6%-7% in 2022. This prediction appears to have largely come true not only for India but for all major economies. This has occurred despite the emergence of new COVID variants which slowed down trade especially during the 3rd quarter.
There appears to be a direct link between the availability of semiconductors and the performance of sectors in terms of trade. Manufactured goods such as iron and steel, agricultural products, and petroleum and its related products all performed well but automotive products and telecommunication equipment either stagnated or declined as far as growth is concerned.
The major threat to the future performance of the external sector for India and other emerging economies is the high level of inflation we are currently witnessing across the globe. The US Fed and other major central banks are expected to tighten their grip on liquidity which will affect the exchange rate. With fewer dollars and euros being available, other economies will find their trade balances being negatively affected as exports will become less profitable and imports will become more expensive. The survey makes the claim, however, that the Indian economy is well prepared for such a scenario as the balance of payments and other indicators have shown healthy numbers over the last two years.
As mentioned earlier, trade figures for 2021-22 have largely been in line with the predictions of the IMF and WTO. India’s merchandise exports between April and December grew by 26.5% compared to the same period in 2019-20, meaning it has recovered beyond the pre-pandemic levels. The export target for the year is $400 billion in terms of value and as of the latest data, the country has achieved 75% i.e, $301.4 billion already. Data for the final quarter is yet to come in. Petroleum products have made up the bulk of merchandise exports at a value of $39.5 billion but the biggest contributor by far has been in the services sector. IT has thus far contributed just short of $90 billion which is nearly 50% of all services exported. It is expected to go beyond $100 billion by the end of the last quarter.
Imports have thus far totalled around $443 billion meaning they too have revived beyond pre-pandemic levels with 21.9% increase over the same period (April-December) in 2019-20. Compared to last year, imports have grown by nearly 70% which the survey believes is down to increased domestic demand. The substantial increase in crude oil prices meant that petroleum imports have grown by 119.2% this year compared to the last. This is, however, only 22.3% increase in comparison to 2019-20. Petroleum and its related products make up the biggest chunk in terms of merchandise imports.
75% of the services imports are in the form of business, transport, travel, and computer services. The total services imports have grown by 21.5% compared to last year. This figure is relatively small as services imports did not suffer as much as other categories through the pandemic.
While the current account deficit has widened, the strong performance of FDI inflows means that the overall balance of payments remains at a surplus of $63.1 billion as of the first half of 2021-22. India’s forex reserves also crossed the $600 billion mark and stood at $635 billion at the end of September 2021.
The increase in trade overall is not surprising and the widening gap between exports and imports are not surprising, either. The protectionist policies that the government has undertaken in recent years might be to blame. The Economic Times recently published an article where it looked at the impact on raising tariffs on the country’s exports. It found that with every 1% increase in tariffs, Indian exports of textiles and clothing shrank by 1.1%. This is because we are increasing tariffs on even our most favoured trading partners who will then naturally retaliate by establishing their own tariffs on us. A significant portion of the country’s exports are fuelled by the MSME’s of which textiles and clothing make up a major portion.
While the Indian government has placed an emphasis on increasing exports, its policies have thus far not addressed the core issues which lie in the manufacturing sector. We have written articles previously wherein the underdevelopment of the Indian manufacturing industry has been discussed, owing to issues like a lack of skill development, regressive labour laws, etc. At the end of the day, incentive schemes and so on will provide a short term boost to the existing manufacturing firms but in order to truly compete on the global stage the country will have to nurture its domestic sector from the ground up.
Since the last two years have been dominated by the pandemic, some allowances can be made for the governments nearsightedness. If anything, the pandemic should highlight the weaknesses of such an approach especially when the merchandise trade deficit more than doubles in just one year. There is no indication in the survey that the government plans to deviate from its current course of action even though some changes are overdue.