 "India vulnerable to further slowdown")
For about 40 years, India followed an isolationist trade policy. This was stupid for one simple reason. India's energy deficiency means enforced imports and a lack of commensurate exports used to lead to a crisis every time oil prices rose.
In 1991, India's merchandise trade (goods imported and exported) came to only 13 per cent of gross domestic product (GDP). Since then, the trade exposure has risen a lot. In 2014, World Bank estimates placed merchandise trade at 37.5 per cent of GDP; it had been as high as 42 per cent in 2012. If commercial services are included, India's exposure to world trade was about 53 per cent of GDP, according to the World Trade Organisation.
India has always run trade deficits, importing much more than it exports. The largest import items have always been energy fuels. About 80 per cent of India's crude oil consumption is imported, along with 30 per cent of its natural gas and 14 per cent of coal. The next major item is usually gold. Imports also include construction machinery and capital goods that generate local revenues. In fact, even crude and gas imports generate revenues. Private refiners like Reliance Industries are big players in the export of refined petro products.
During April-December 2015, exports dipped 18 per cent to $196.6 billion, compared to $240 billion in April-December 2014. Estimates suggest a total of $265-270 bn in 2015-16, much lower than the $310.5 billion in 2014-15. Imports were $296 billion for April-December 2015 (down 15 per cent from April-Dec 2014), leading to a trade deficit of $99 bn (it was $112 bn in April-Dec 2014).
Values have been scrambled by the crash in energy prices and downstream fertiliser and refined petro products, as well as the price of metals. However, non-oil imports dropped three per cent in 2015 and non-petro exports dropped nine per cent. The trade deficit has reduced and that masks the problems to some extent. Shrinking trade implies economic activity is lower. Exporters are obviously under pressure. Importers are shunning investments. There is also a real fear that Indian goods are increasingly uncompetitive.
Note that the global economy is growing, albeit slowly. So is global trade. A few years before, global trade was growing at double-digit rates but is now doing so at two to three per cent a year. However, Vietnam and Bangladesh for example, have gained ground in terms of share in global trade. India has lost ground.
Cargo statistics also suggest stagnation. Major ports (controlled by the Centre) saw a three per cent traffic rise in tonnage terms across April-Dec 2015, compared to April-Dec 2014. However, part of that increase is due to the restarting of iron ore movements from Goa, where mining and export had been banned by the Supreme Court. Non-major ports (not controlled by the Centre) saw a one per cent slump in tonnage in the same period. Major ports process about 55 per cent of total cargo traffic. So, there might have been a slight increase, overall.
Trade competitiveness depends on many variables. One is currency value. There is a case for the rupee to be pushed down further as China's yuan weakens. This would make Indian goods more competitive and raise a barrier against cheaper import. However, currency is not the only variable deciding competitiveness. India's problem here arises from many other factors, too. It has poor infrastructure, there are massive barriers in terms of red tape, tax codes are opaque and discretionary, labour markets are inflexible and labour quality is low skilled. It is hard to manufacture at scale. Domestic financing is expensive. Land is expensive and scarce. It has lost out multiple times in trade negotiations.
The government has not been able to make much headway on several of these fronts, such as tax reform, labour reform or land acquisition. Infrastructure development continues to stagnate, with many stalled projects. The Budget must address as many of these issues as it can. There could be a crisis if exports shrink much longer. At some point, the trade deficit, and its big brother, the current account deficit, could hit awkward proportions. India is more vulnerable than most policy makers would care to admit to a further slowing in global activity. It is very vulnerable, indeed, to any sudden spike in energy prices.
In 1991, India's merchandise trade (goods imported and exported) came to only 13 per cent of gross domestic product (GDP). Since then, the trade exposure has risen a lot. In 2014, World Bank estimates placed merchandise trade at 37.5 per cent of GDP; it had been as high as 42 per cent in 2012. If commercial services are included, India's exposure to world trade was about 53 per cent of GDP, according to the World Trade Organisation.
India has always run trade deficits, importing much more than it exports. The largest import items have always been energy fuels. About 80 per cent of India's crude oil consumption is imported, along with 30 per cent of its natural gas and 14 per cent of coal. The next major item is usually gold. Imports also include construction machinery and capital goods that generate local revenues. In fact, even crude and gas imports generate revenues. Private refiners like Reliance Industries are big players in the export of refined petro products.
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Given India's exposure, trade trends are critical indicators of economic health. Both imports and exports dropped sharply through last year. In fact, exports and imports have dropped for 13 months in a row (December 2014-Dec 2015, both months inclusive).
During April-December 2015, exports dipped 18 per cent to $196.6 billion, compared to $240 billion in April-December 2014. Estimates suggest a total of $265-270 bn in 2015-16, much lower than the $310.5 billion in 2014-15. Imports were $296 billion for April-December 2015 (down 15 per cent from April-Dec 2014), leading to a trade deficit of $99 bn (it was $112 bn in April-Dec 2014).
Values have been scrambled by the crash in energy prices and downstream fertiliser and refined petro products, as well as the price of metals. However, non-oil imports dropped three per cent in 2015 and non-petro exports dropped nine per cent. The trade deficit has reduced and that masks the problems to some extent. Shrinking trade implies economic activity is lower. Exporters are obviously under pressure. Importers are shunning investments. There is also a real fear that Indian goods are increasingly uncompetitive.
Note that the global economy is growing, albeit slowly. So is global trade. A few years before, global trade was growing at double-digit rates but is now doing so at two to three per cent a year. However, Vietnam and Bangladesh for example, have gained ground in terms of share in global trade. India has lost ground.
Cargo statistics also suggest stagnation. Major ports (controlled by the Centre) saw a three per cent traffic rise in tonnage terms across April-Dec 2015, compared to April-Dec 2014. However, part of that increase is due to the restarting of iron ore movements from Goa, where mining and export had been banned by the Supreme Court. Non-major ports (not controlled by the Centre) saw a one per cent slump in tonnage in the same period. Major ports process about 55 per cent of total cargo traffic. So, there might have been a slight increase, overall.
Trade competitiveness depends on many variables. One is currency value. There is a case for the rupee to be pushed down further as China's yuan weakens. This would make Indian goods more competitive and raise a barrier against cheaper import. However, currency is not the only variable deciding competitiveness. India's problem here arises from many other factors, too. It has poor infrastructure, there are massive barriers in terms of red tape, tax codes are opaque and discretionary, labour markets are inflexible and labour quality is low skilled. It is hard to manufacture at scale. Domestic financing is expensive. Land is expensive and scarce. It has lost out multiple times in trade negotiations.
The government has not been able to make much headway on several of these fronts, such as tax reform, labour reform or land acquisition. Infrastructure development continues to stagnate, with many stalled projects. The Budget must address as many of these issues as it can. There could be a crisis if exports shrink much longer. At some point, the trade deficit, and its big brother, the current account deficit, could hit awkward proportions. India is more vulnerable than most policy makers would care to admit to a further slowing in global activity. It is very vulnerable, indeed, to any sudden spike in energy prices.