Modi govt's import move not much help on current account deficit

Centre's strategy on cutting imports of non-essential items unlikely to have a significant impact, say experts

On Friday, the NDA government announced a five-pronged approach to boost capital inflows into the country to finance the rising current account deficit (CAD). It also announced its intention to curb imports of non-essential commodities, presumably by tinkering with the duty structure.

While the former measures may boost capital flows, the latter is unlikely to make a significant dent in the country’s CAD, experts Business Standard spoke to said.

Part of the problem can be traced to the changing composition of India’s trade deficit over the past few years, where gains made by the decline in the gold deficit have been offset by the rising deficit on account of electronic items and ores and mineral. 

Data from Kotak Institutional Equities shows that the country’s gold and gold jewellery trade deficit dropped from $40 billion in FY13 to $10 billion in FY17. Subsequently, it rose to $22 billion in FY18.

But despite this rise, gold trade deficit is now eclipsed by electronic items, whose deficit has surged from $25 billion in FY13 to $48 billion in FY18.

A closer look at the data (four-digit HS Code), released by the ministry of commerce and industry, reveals that about 50 per cent of imports under this category are related to phones, especially mobiles.

While the index of industrial production (IIP) shows a strong growth in this category, experts said that even as the number of mobile phone plants have increased in the country, they tend to be largely assembling units. The parts are largely imported. As a result, the value addition in India is extremely limited.

“You are basically importing parts from countries such as China and then assembling them in India. Not much value addition is happening in the country,” says Madan Sabnavis, chief economist at CARE.

The current net value addition for most in the industry is around 11 per cent, as against the target of 14.7 per cent in 2017, shows data from the Indian Cellular Association (ICA). 

This suggests that domestic production is unlikely to replace imports of these items in the immediate future. 

In the past, when the government imposed measures to curb gold imports, it did have an immediate impact of reducing gold imports which lowered the country’s current account deficit. For instance, gold imports fell from $54 billion in FY13 to $29 billion in FY14 according to a report from Kotak Institutional Equities.

But with mobile phones, it is difficult to see how similar curbs can reduce the appetite. 

The government has already raised basic customs duty on 42 categories including high end electronic imports sucha s smartphones and LCD TVs in its last budget. It has also provided incentives to manufacturers through the phased manufacturing policy. But these measures have failed to dent the soaring electronic imports. 

“Demand determines the pattern of imports. In recent years, much of the increase in household income has been concentrated at the top end of the income distribution. This is fuelling demand for expensive items such as high-end mobile phones,” says Pronab Sen, former chief statistician of India.

A similar rise is also observed in the Ores and minerals trade deficit, which is largely due to the spurt in coal imports. “Imports of ores and minerals is largely due to the rise in coal imports,” says Suvodeep Rakshit, economist at Kotak Institutional Equities.

In the current financial year (April to August), the value of coal imports is estimated at around $10.9 billion, up 28 per cent over the same period last year. This rise in imports can be traced to Coal India failing to keep up with the rise in demand, coupled with domestic preference for Indonesian coal, and bottlenecks in moving coal from pitheads to power stations, said experts. As such it is difficult to see how this deficit can be reduced in the short run unless stiff measures are taken. 

Latest data shows that imports of electronic items and coal together account for roughly 18 per cent of all imports. Add to that, imports of crude and gold, which together account for another 34 per cent, and it is difficult to see how the deficit can be curbed significantly in the short run. Icra estimates that the current account deficit is likely to have crossed 3 per cent of GDP in Q2FY19. For the full year, it estimates the deficit at 2.8 per cent of GDP.

“In the current environment, measures to curb imports are simply unworkable. The country has certain commitments under the WTO. You have your trade agreements with other countries. And you are also negotiating RCEP. So, I don’t see how this can happen. The problem is more structural in nature,” said trade expert Biswajit Dhar.