Sustaining export growth

Commodity prices will push up trade deficit

The Union Ministry of Commerce has released the preliminary data for India’s merchandise trade during April. The trade deficit crossed $20 billion in the month, as both imports and exports increased. A large part of this shift is due to high commodity prices, driven by both supply chain-related factors and the outbreak of war between Russia and Ukraine. Imports went up by 27 per cent year-on-year (YoY), driven in particular by crude oil, which increased by 81 per cent, and coal, which went up by 136 per cent over the equivalent month of the previous year. Consumers have also noted the increasing prices of cooking oil, and those are reflected in these statistics, with the import bill for vegetable oils increasing by over a third YoY. Fortunately, for the deficit, an increase in perceived stability has led to lower gold demand.

Exports also increased substantially, by 24 per cent YoY, and are nearing record levels when measured in current dollars. But this is also, of course, partly a function of commodity prices. Exports of petroleum products more than doubled, with a 113 per cent increase compared to April 2021, and chemicals increased by 27 per cent. However, what will be of particular interest is that a much-heralded increase in electronics goods exports, driven by targeted government policy and recovering global demand, appears to be sustaining itself over time. Exports of electronics goods increased by 64 per cent YoY, although engineering goods went up only 15 per cent. An analysis of these figures should try and separate the medium-term effects of higher commodity prices and the hopefully more long-term effects of a more export-focused finished goods sector within the country. Most experts assume the Russia-Ukraine crisis will last for some time, and indeed Europe’s long-term shift away from dependence on Russian oil and gas will snarl the energy supply chain and keep prices high. It has been recorded that India is seeking deeper discounts on energy imports from Russia. But there is a ceiling on such imports in quantitative terms and thus it can reasonably be assumed that the deficit, driven as it is largely by the level of energy prices, will remain high.

The concern also has to be to ensure that engineering and electronics goods continue to see export growth, and that this dynamism spreads to labour-intensive sectors like garments and leather goods. There are three interventions the government needs to make to ensure this. First, it is necessary to see to it that competitiveness increases spread throughout the exporting sector. This will require further an upgrade of trading infrastructure — both physical and softer procedural requirements. Second, it is necessary that India take stronger steps on market access for its exports by speeding up new trade agreements that lower tariffs all round. Hopefully, the years in which India raised tariffs to protect domestic industry are over, as it is clear that does not help in accessing global supply chains. Finally, pressure on the rupee to depreciate must not be fought by the Reserve Bank of India. Given the exit of global capital as Western central banks tighten monetary policy, it will be necessary merely to manage the fall of the rupee. This will enhance export competitiveness all round.