Non-essential curbs

Policy focus must shift from imports to exports

The expanding trade deficit has prompted the government to actively curb imports. Reflecting the global economic slowdown, India’s merchandise exports contracted 8.8 per cent in February to $33.88 billion, compared to the same period last year. For this fiscal year so far (April-February), merchandise exports have grown 7.55 per cent, compared to the equivalent period last year. Merchandise imports also contracted 8.2 per cent in February, while the trade deficit was at $17.43 billion. The merchandise trade deficit for the fiscal year so far came at $247.53 billion. It was about $172 billion during the same period last year. Sustained robust growth in services exports has helped narrow the overall (merchandise and services) trade deficit.

Although analysts expect the current account deficit to remain around 2.5 per cent of gross domestic product this fiscal year, and moderate somewhat in the coming year, financing could pose challenges. The flow of foreign direct investment has slowed and continued selling by foreign portfolio investors could put pressure on the overall balance of payments. The ongoing volatility in global financial markets and uncertainties related to policy action by large central banks could continue to affect capital flows. India, however, has sufficient foreign-exchange reserves, which should help overcome near-term challenges and maintain stability on the external front. Orderly depreciation in the currency over time would also help stabilise the external account. Thus, from an immediate macroeconomic-stability standpoint, the government’s enthusiasm to curb imports is misplaced. Even from a longer-term economic management viewpoint, it is not only unnecessary but could prove damaging.
 

The Union commerce secretary noted on Wednesday that strategies to contain “non-essential imports” were working, which led to lower imports in February. The idea broadly is import substitution. The government, in fact, has been working on reducing imports for several years and has raised tariffs along with other barriers. Recent reports suggest the government would now be issuing fresh quality-control orders to curb imports. As has been argued by this newspaper, the approach adopted by the government has a number of problems and will not lead to desired outcomes. All efforts so far, for instance, have not led to any meaningful decline in imports. It is hard for any bureaucracy to determine non-essential imports in a functioning market economy. This will only lead to higher costs and affect the overall competitiveness of the economy. The approach also opens the scope for lobbying, which will certainly not help the economy. India has tried such measures for decades before liberalisation, and the results are unlikely to be different this time around.

It is absolutely normal for a market economy to import goods and services in areas where it has domestic capabilities. It is worth noting here that India’s services exports are doing exceedingly well. Most of it is related to information technology and being exported to developed economies. Corporations are importing from Indian firms not necessarily because of a lack of capability in their countries; they are doing so because the outcome is more efficient. Thus, instead of excessively focusing on imports, Indian policymakers would do well to spend more time and energy on exports. Sustained export growth would not only address the current account deficit but also drive private investments and job creation, leading to higher sustainable economic growth.