Widening trade deficit cause for worry

By K R Sudhaman. Dated: 3/9/2018 12:31:32 AM

Widening trade deficit to a 65-month high at $16.3 billion in January this year have raised eyebrows among pundits that too at a time when India's exports have started looking up somewhat in recent quarters after poor showing last couple of years. This is because of surge in imports of crude oil and precious stones. Global Oil prices have started increasing lately and it is not clear where it is going stabilize. The trade deficit might have expanded much faster this year than last year but the fact of the matter is that this is the right time for India to start big ticket exports reform so that the country played significant role in World Trade.
During the first 10 months of the financial year, the trade deficit expanded to $131 billion against $88 billion during the same period a year ago as imports grew faster than exports.
Exporters had complained that the imposition of integrated goods and services tax (GST) and delays in refund of input tax credits were hurting overseas shipments, prompting the GST Council to continue two pre-GST era schemes that allow duty-free sourcing of materials for export production until March 2018. Exporters insist duty refunds under GST have been tardy.
Ganesh Kumar Gupta, president, Federation of Indian Export Organisations, urged the government to look into the refund issues seriously and undertake a clearance drive to clear all cases by 31 March, 2018. "Alternatively, banks may be asked to finance exporters against the pending GST refund claims with interest to be borne by the government," he added.
Aditi Nayar, principal economist at Icra Ltd, said the marginal growth in exports of gems and jewellery and contraction in sectors such as textiles, yarn and iron ore dampened the expansion of merchandise exports to a three-month low in January.
"With the merchandise trade deficit for January sharply higher than expected, we have revised our forecast for the FY2018 current account deficit to $47-50 billion or nearly 2% of GDP, from the earlier expectation of $42-44 billion," she added.
In January, exports of gems and jewellery (0.9%), drugs and pharmaceuticals (8.6%), chemicals (33.6%), engineering goods (15.8%), and petroleum products (39.5%) rose while shipments of ready-made garments declined by 8.4%.
Apart from crude and precious stones, imports of other items such as coal (31.7%), chemicals (48.4%), plastic (42.7%), iron and steel (28.8%), non-ferrous metals (42.5%), machinery (29.1%), transport equipment (4%) and electronic goods (12.2%) also saw a broad-based increase.
The WTO's latest World Trade Outlook Indicator (WTOI) released on 12 February suggests that the trade recovery of 2017 should continue, with solid trade volume growth in the first quarter of 2018. The multilateral trade body has projected that growth in merchandise trade volumes will slow down to 3.2% in 2018 against 3.6% in 2017.
India missed the bus in early 2000, when it had an opportunity to become a global hub for manufacturing as well as services. India's share in goods exports was less than 2 per cent in World exports as against China's nearly 14 per cent. But in Services exports our performance is slightly better at around 3.5 per cent of World exports. Today there is yet another opportunity for India to become a global exports hub if only right policy is put in place to push both goods and services exports through big ticket reforms. After global trade being in the negative territory growing less the World GDP growth, it has started looking up growing rapidly at 4.7 per cent this financial year. According to International Monetary Fund, global trade is expected to grow impressively at around 4.6 per cent in the next couple of years. Time is ripe for India to cash-in. After exports growth being in negative territory, it has started looking up growing at 9-10 per cent this financial year even though there is small blip in January.
According to H A C Prasad, who until recently was principle economic advisor in the finance ministry, has come out with two separate studies on the challenges and policy initiatives needed to take India's goods and services exports to a new high.
Prasad, who was earlier economic advisor in the commerce ministry, is of the view that there are green shoots in India merchandise exports that is goods exports. So it is only appropriate to raise India's share in World exports to a respectable five per cent. For this India's goods exports should reach $882 billion by 2020, which means India's export growth rate needed to be around 27 per cent CAGR in five years. This is not impossible as India has had higher exports growth than this during 2004-09.
Service exports, which had gone from $53 billion in 2005 to $162 billion annually in 2016, has done better than goods exports growth in the first half of 2017-18 at 16.2 per cent. Various initiatives have already been taken by government to push services exports but more needed to be done now that ill-effects of demonetization and rollout of Goods and Services Tax are now behind us.
Prasad is of the view that India's goods exports have to firstly made demand based rather than supply based as at present and with regard to services exports, there is a need for 'services from India' initiative just as make in India initiative to promote manufacturing exports from the country.
In most of the top imports of the World, the presence of India's exports is very small. In 2015, India's exports share in the top 100 items was not that impressive and only in 5 of those items, the share was more than 5 per cent. That's why there is need for making our exports demand based rather than supply based. Likewise there is need for rationalizing tariffs. Though average customs duty is around 10 per cent, the real applied duty is around 2.8 per cent because of various exemptions provided. This is creating distortions. However, the recent hike in customs duty in some of the electronics items in the budget is however warranted to promote make in India programme. This has had also helped in reversing inverted pyramid customs duty structure that was hindering domestic manufacturing.
On Ease of doing business, though India has moved up in the global ranking, it has still a long way to go. India is still much behind many ASEAN countries in trading across borders. Some specific steps were needed. Though there are claims of single window customs clearance for exporters, still there are hurdles which needed to be rectified. India is the cheapest and largest manufacturer of agri products particularly fruits and vegetables and yet India's share in global exports is very low. This is one area where government has come out with out of the box initiative so that India became not only a major exporter but also address livelihood concern of the farmers. There is also need to create an Ombudsman for resolving export related problems and disputes. Presently there is no clear cut mechanism apart from being bureaucratic.
On promoting services exports, Prasad, who has done a lot of research on it, pointed out that there was a need for reforms in domestic regulations so that it is conducive for services exports rather than erecting restrictive trade barriers. There are many market access trade barriers in India's trading partner countries, which included visa issues, shipping, licensing of professional services and so on. There is also tremendous potential for disinvestment of services PSUs both at central and state levels, particularly that of hotels.
However in the case of shipping, there is need for strengthening and domestic shipping industry including that of public sector. At present less than 10 per cent of India's merchandise exports are carried by domestic shipping liners. Though India allowed 100 per cent FDI in shipping as early as 2001, no foreign investment has come so far. Government should make mandatory for domestic liners to carry bulk imports as well as some of the exports besides making it cheaper to shipments through domestic liners. This area one area government should look into seriously apart from improving port facilities and connectivity, which has not received adequate attention including creation of transshipment ports. Even Colombo has a major transshipment port, which is far superior to the best ports in India.
These reforms needed to be attended to immediately if India needed to get back to high exports growth path of over 20 per cent annually in both goods and services considering favourable global trade environment, expected to last at least next few years. Higher exports growth will also help in pushing up job creation as sizeable exports are from small and medium industries. Also this help in boosting India's GDP growth by at least two percentage points to 8-9 per cent annual growth.
* (K R Sudhaman, a senior journalist, who was formerly Editor Press Trust of India and Economics Editor in Financial Chronicle and TickerNews)



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