This is more because of India’s faulty trade policies; adverse global conditions have only worsened it

As India prepares for the next budget, here is another critical issue it needs to focus on: the galloping trade deficit. According to the First Advance Estimate (AE1), released earlier this month, the trade deficit is set to hit an all-time high of 7.1% of the GDP in FY23. There are four major proximate reasons for this rise which needs overhauling: (i) import substitution policy since 2014 (ii) dumping big multilateral trade agreements since 2019, preferring to rely on bilateral trade agreements instead and (iii) impulsive trade policy with China since 2020 and (iv) constant fiddling with exports.

First, the state of India’s trade.

Skewed trade
The trade deficit remained low for decades. Only once had it touched 4% of the GDP (1957-58) before FY09, when it suddenly shot up to 5% from 2.8% in FY08. It touched a high of 6.5% in FY12 and then went down to a low of 1.1% in FY17. It again climbed up to 4.8% in FY22 and now, in FY23, all the previous highs are likely to be surpassed (with a 7% trade deficit). (NB: All the data used here are from the 2011-12 GDP series, including its back series, at constant prices.)

Imports were in the single-digit (of the GDP) until 1994-95 and then zoomed past 30% of the GDP in FY12 (31.1%) and FY23 (31.3%). Then it went down, touching a low of 21% in FY21 (the first pandemic fiscal). It is climbing rapidly again with AE1’s projection of 29.7% in FY23.

Exports, one of the growth engines which, as former Chief Economic Advisor (CEA) Arvind Subramanian had reminded the Indian government in 2020, performed “a critical role” for three decades in India’s overall growth in the post-liberalized era, touched a high of 25% of the GDP in FY13 and FY14. Then it began to slide, reaching 18.8% in FY21, but is likely to improve to 22.7% in FY23 (AE1).

The actual trade data during April-November 2022 (FY23), released by the Ministry of Commerce and Industry earlier this month shows trade deficits (merchandise and services) jumped to $118 billion – up from $57.3 billion during the corresponding period of 2021. If the trade deficit in merchandise goods alone is considered, the deficit jumped to $218.9 billion – up from $136.5 billion in the corresponding previous year. It is the surplus of $100.8 billion generated by the trade in services that brings down the total trade deficit to $118 billion during April-November 2022.

A major cause of the high trade deficit is its rising imports from China.

After the border stand-off in 2020, India actively discouraged trade with China. But the result is contrary to what was expected. In FY21, its trade deficit with China was $102.6 billion, which jumped to $191 billion in FY22. During April-November 2022 (FY23), for which data is available, the trade deficit stood at $58 billion.

The imports from China ballooned from $65.2 billion in FY21 to $94.6 billion in FY22 and during FY23 (April-November 2022) it has already touched $67.9 billion. On the other hand, the exports to China increased marginally from $21.2 billion in FY21 to $21.3 billion in FY22 but in FY23 (April-November 2022), it is a low $9.9 billion.

Policies responsible for high trade deficits, low exports

High trade deficits mean higher outgo of foreign exchange reserves. Foreign investments (FPI/FII) continue to pull out from Indian markets, FDI inflows have slowed down, the US is likely to further raise the interest rate to fight inflation to add to FPI/FII and FDI worries, the Brent crude prices have come down but still remains on the higher side of $80 per barrel, the – all of which will continue to put a strain on foreign exchange reserve.

Most of India’s trade woes are self-inflicted.

Since 2014, the Modi regime has been raising import barriers. In 2020, it officially declared that this is to protect domestic industry and improve domestic manufacturing in its Aatma Nirbhar Bharat policy – a failed policy of the 1960s and 1970s. It continues to follow the same import substitution policy despite warnings from economists that this will promote shoddy products which can’t compete in global markets.

There is yet another consequence of restricting imports. A 2020 study by the Institute for Studies in Industrial Development (ISID) said “import intensity” or the import components in the exports of goods and services from India, had risen from 10.5% in 1993-94 to 32.5% in FY14 for the whole economy and from 12.9% to 51% for the manufacturing sector (for petroleum products, the jump was from 5.8% to 91.4%).

What this means is that India’s exports (as indeed the case for other developing economies) are highly dependent on imports of raw materials and intermediaries. If imports are restricted, it would end up hurting exports, which is now visible. But imports have not gone down, it is now rising to their previous highs. The same is the case with trade with China.

In another self-inflicting wound, India has shunned multilateral trade. In 2019, it walked out of the China-led Regional Comprehensive Economic Partnership (RECEP) after years of negotiations. In 2022, it kept out of the trade agreement under the US-led Indo-Pacific Economic Framework (IPEF). Come to think of it. These two groups together control 70% of the global GDP and 53% of the global trade. What chance does India have to re-energize its exports (growth engine) or join the global supply chain? Very slim.

To add to the trouble, India is constantly changing its trade policies to restrict exports of commodities (wheat, rice, sugar etc.). Once India went to the ridiculous extent of promising to feed the world after the Russia-Ukraine war broke out in February 2022, and months later, it was contemplating importing wheat to feed its own people because it hadn’t done its homework. Wheat shortages have spiked its price; in January 2023, it made record highs.

Rational and predictable trade policies are critical to high exports and high growth. India must put in place a well-considered trade policy regime first and abjure impulsive decisions. Blaming it on adverse global conditions which have developed in the post-war scenario will not help.

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