After having raised an alarm over what it saw as an unacceptably high current account deficit to gross national product (GDP) ratio of nearly 4.0 per cent, the Reserve Bank of India noted in its recent policy statement that the CAD/GDP ratio was at a more manageable level of closer to 2.5 per cent. A large part of this comfort has come from an impressive performance on the export front. Recent export data have come as a break in the clouds after months of not-so-positive news on the external trade front. Exports grew at 31.4 per cent (year-on-year), during April-February of FY11, to a total of US$208 billion. Exports for the year as a whole are projected to be $235 billion, 9 per cent higher than the earlier estimate of $215 billion. Year-on-Year growth in imports during April-February was of the order of 18 per cent. Annual imports for FY11 are expected to be in the vicinity of $350 billion, which would lead to a lower trade deficit of $115 billion. If the export target is met, the current account deficit would fall to 2.5 per cent of GDP (one percentage point lower than current estimates), assuming no significant drop in remittances. The increase in exports owes in no small measure to the far-sighted strategy of diversifying export geographies to Africa and Latin America, besides several export-promotion schemes launched in recent years. A much awaited pick-up in exports to the US has also helped, though the recovery in exports to the European Union is still tepid.
‘Engineering goods’ registered an 88 per cent increase (year-on-year) during April-February, totaling $52.7 billion. While India is nowhere close to becoming a manufacturing exports-led economy like East Asia in the 1970s and 1980s and China more recently, the increased share of manufactured goods is a welcome sign and should be accelerated. There is still considerable room for improvement in India, especially in boosting productivity. From a productivity standpoint, India’s manufacturing sector lags not only the advanced economies, but much of the deve loping world as well. In particular, the small and medium enterprises (SME) sector, which accounts for 40 per cent of manufactured exports, is in dire need of capitalisation to enable technology upgrading. The ‘New Manufacturing Policy’ that was supposed to contain a blueprint for revitalising SMEs must be implemented without any further delay. Besides engineering goods, sectors such as electronics, plastics, chemicals, pharmaceuticals and gems & jewellery, in which exports have risen sharply and can continue to do so need special focus.
Exports have increased sharply since 2004, despite the rupee having depreciated by barely 4 per cent since 2004-05. The link between currency depreciation and export growth has always been tenuous, something India’s recent experience vindicates. India can afford a Chinese style export-led growth ‘miracle’ only at a very high cost as seen earlier this decade. Between 2004 and 2007, the RBI’s policy of buying excess dollars to prevent the rupee from appreciating resulted in huge payouts by way of MSS bonds, not to speak of the inflationary pressures unleashed within the economy. While some trade related intervention may be necessary, the way forward is through across-the-board productivity increases in manufacturing.
India’s engagement with the global economy is irreversible and the overall trade numbers (both exports and imports) can only increase from here on, especially as the lagged effect of the numerous free trade agreements signed in recent months comes into play. Increased engagement with dynamic economies especially if it leads to economy wide technology spillovers through foreign direct investment can be a win-win situation all around. A vibrant foreign trade sector can augment domestic consumption and investment as the driver of economic growth that is both robust and inclusive.