MAKING SENSE OF RECORD EXPORT AND RECORD CURRENT ACCOUNT DEFICIT

Image Source: hindubusinessline

On 23 Mar 2022 PM tweeted, “India set an ambitious target of $400 billion of goods exports & achieved this target for the first time ever. I congratulate our farmers, weavers, MSMEs, manufacturers, exporters for this success. This is a key milestone in our Atmanirbhar Bharat journey.”

Modi ministers and Modi (Godi) media went on overdrive to celebrate this manufactured success of growth in exports, implying that the economy is doing well and more importantly Modi is doing well. To understand the truth, we need to understand Modi’s method of sustenance in power. The essence of it is to highlight some falsehood or half-truth which shows Modi in positive light and then use the Modi media for promotion. Modi’s model has been successful because the Hindu masses do not understand much of economics and perceive that Modi is not incompetent and even if he is, then Rahul is worse (another falsehood created through crores spent on propaganda through IT Cell and Modi media). Let me explain the truth about exports and imports for a layperson to understand.

What are Exports?

A country’s exports (goods and services sold abroad) include both goods and services. India has had a robust services sector export for some time thanks to our software industry and related services.

Goods exports cover all tangible products, from food items like rice, wheat, spices and sugar, as well as engineering goods, chemicals, raw materials for garments like cotton, as well as garments and handloom products.

What are Imports?

All goods and services that a country buys from abroad are imports.

Understanding Exports Growth

As the world and India’s economy grow, trade also grows. In Rupee or dollar terms exports growth is natural. In normal course exports and imports are measured as a percentage of GDP because it gives a good perspective rather than a figure of $400 billion. When the value of the dollar is rising, expressing figures in dollar terms rather than quantity would appear impressive. When the aim is to get headlines or impress, to use such figures makes political but not economic sense! There were several reasons for the growth of exports. Major reasons are enumerated below:

·        During Covid, US and the West gave large amounts of money to their population as social security. US printed a lot of dollars. Interest rates were low. Thus, money supply in the world increased. Some of this foreign money came into the Indian stock market as well. India’s foreign exchange reserves grew to record heights. Record forex reserves were also attributed to Modi’s economic genius for political reasons.

·         Covid had reduced world trade; there was pent up demand in the world. India’s exports increased as a result of this pent-up demand.

·        The demand for goods and services in the world was much higher than the supply and as a consequence the world is witnessing record inflation.

·        The central banks of countries have been raising interest rates to control inflation; the impact of which will come into effect only gradually.

·        The supply chain disruptions caused by COVID-19 also offered Indian industries the opportunity to wean countries away from dependency on China. China’s production still remains reduced because autocrat Jinping’s economic cum Covid policies are worse than Modi’s.

Which Sectors Saw the Greatest Growth?

·        Compared with the April-February period for the previous year, India’s merchandise exports grew by 46.09 percent.

·        There are a number of sectors which performed well and even beyond expectations.

·        Petroleum product exports saw the greatest rise in percentage terms thanks to increased crude prices. Comparing February 2022 to February 2021, the increase was 88.14 percent, from $2471.16 million to $4649.24 million. Over the April-February period, the growth was a staggering 147.6 percent increase. India benefitted by buying oil from Russia and exporting petroleum products.

·        In absolute numbers, engineering goods exports raked in the most money, with February 2022 figures coming in at $9,321.78 million, an increase of 32.04 percent year on year. Over the April-February period, they grew by 49.7 percent.

·       Electronic goods exports grew by 42.8 percent over the April-February period, while gems and jewelry exports increased by 57.3 percent.

·       The agriculture sector had its best ever year in terms of volume of exports, with India emerging as a major global supplier of food / essential agriculture products. If Modi had not imposed a ban on wheat exports, then India would have exported even more. The increase in the exports of food products was caused more by Putin’s attack on Ukraine rather than Modi’s genius.

How Big a Deal Is This and Why?

·        A country’s exports are generally a good bellwether to see how its economy is doing, and high exports can be a good way to increase employment levels and boost micro, small and medium enterprises (MSMEs).

·        Goods exports increases, especially if driven by manufactured goods rather than just commodities and raw materials, are a sign of a country being able to diversify its trade opportunities, and create more value.

·        Growth in exports obviously means increased inflow of foreign currency, which is again good for the health of the economy.

·       While India’s growth in merchandise exports has been impressive, during the same fiscal year, merchandise imports have grown by a greater degree, to $550 billion in the first 11 months of the fiscal year.

·       The increase in merchandise exports from April 2021-February 2022 compared with the previous year is 46.53 percent, but the increase in merchandise imports is 60.01 percent for the same period.

·       As a result, the trade deficit when it comes to foreign trade is also at a record high of $176 billion for the first 11 months of the fiscal year, and the increase in exports has to be considered in this light as well.

·       During April-September 2022, exports recorded a growth of 16.96 per cent to $231.88 billion, the data showed. During the same period, imports rose by 38.55 per cent to $380.34 billion, while the trade deficit widened to $148.46 billion against $76.25 billion in September 2021.

·       Exports of engineering goods dipped by 10.85 per cent to $8.4 billion in September. Similarly, the export of all textiles declined by 18 per cent to $1 billion. Shipments of plastics decreased by 12.2 per cent to $660.66 million.

·       However, exports of gems and jewelry, petroleum products, leather, pharmaceuticals, chemicals, and rice have recorded positive growth during Sep 2022.

·       At imports front, inbound shipments of oil dipped by 5.38 per cent to $15.9 billion. Similarly, gold imports contracted by 24.62 per cent to $3.9 billion.

·       Coal, coke and briquettes imports rose by 60.82 per cent to $3.5 billion in September.

·       Further, the ministry said that the estimated value of services export for September 2022 is $25.65 billion, an increase of 18.72 per cent over September 2021. Imports too rose by 20 per cent to $15.10 billion.

·       The estimated value of services export for April-September 2022 is $150.43 billion, exhibiting a positive growth of 27.88 per cent vis-a-vis April-September 2021.

The CAD (Current Account Deficit) Crisis

Trade numbers for the fiscal 2022-2023 are looking dismal, and the expectation is that for the Q1 and Q2, the Current Account Deficit (CAD) will be the highest in nine years.  The CAD is expected to be around 3.5 percent of GDP. This will cause a reduction in forex reserves and cause the Rupee to fall further. You will not read about this through Modi or Modi media report.

A quick search on items reveals that there are six such items which contribute more than 70 per cent of India’s trade deficit.  

Controlling CAD would call for understanding the nature of the deficit and policy response to counter it. 

These six items of interest are:

1.      Mineral fuels, oils, and bituminous substances.

2.      Natural or cultured pearls, semiprecious stones, diamonds and Gold.

3.      Electrical machinery and equipment, sound recorders, and TV.

4.     Nuclear reactor, Boilers, machinery and mechanical equipment.

5.     Organic chemicals.

6.     Iron and steel.

All of these items are income-elastic, that is, the imports are likely to increase when any economy is growing. India is one of the fastest growing large economies, with GDP projected to grow around 6.5 per cent this fiscal year. Therefore, it is not surprising that India will need more mineral fuels, such as coal, petroleum and natural gas to sustain growth. 

Among these six major commodities, items falling under mineral fuels stands out. Over the last four years, on average, mineral fuel items were contributing around $93,313 million, annually, to CAD. However, during the current fiscal, in the first quarter alone, it contributed to denting India’s CAD by $68,031 million.  

This sudden rise in import bills on account of mineral fuels has to do with a stronger US dollar (that is, a depreciating rupee) and a rise in the price of crude oil in the international market.  

For instance, oil prices went up from around $87 a barrel in January 2022, to around $118 in June 2022. Additionally, starting this year, the value of the Indian rupee depreciated by more than 7 per cent, breaching a historic low of Rs 82 to a dollar.  

The share of mineral fuel items in India’s total imports is around 38 per cent whereas its share in India’s total exports is around 22 per cent. India mainly imports crude oil and thermal coal. Corporate conglomerates such as Reliance then convert imported crude oil into refined petroleum products such as motor gasoline., diesel fuels, liquified petroleum gas, etc., which are meant for domestic consumption and exports. A growing economy means more demand for transport and energy (met primarily by thermal coal imports). 

Apart from mineral fuels, another product category that has contributed most to the rising CAD are pearls, diamonds, and gold. This category suffered because of the Russia-Ukraine war. Due to a shortage in supply of rough diamonds and semiprecious stones from Russia, India had to import similar items from high-cost supplying countries in Africa.  

Like in the case of mineral fuels, India imports rough diamonds and semiprecious stones, polishes and designs them into jewelry, and thereafter re-export.  

The case for gold is a little different. Over the last ten years, during 2021, India witnessed the largest amount of gold imports. Most part of the gold imported is meant for domestic consumption, with a little element of intra-industry trade. 

Two other items, namely, organic chemicals and iron and steel, contributed sporadically to CAD. Take, for instance, organic chemicals. During the COVID pandemic, India was dependent heavily on raw materials or Active Pharmaceutical Imports (APIs) used for manufacturing medicines from China. The percentage share of API imports from China increased from a tiny 1 per cent in 1991 to 70 per cent in 2020.  

Organic chemicals also find usage in the making of Personnel Protective Equipment kits and other dyes used during COVID times. Although India is a leading exporter of generic drugs, the difference in the trade balance was stark with the start of the pandemic. 

The case with increment in iron and steel imports can be attributed to India’s commitment to building more physical infrastructure in the form of roads, land ports, sea ports, and airports. It is to be noted that in the budgetary allocation for the fiscal 2022-2023, the FM increased capital expenditure to Rs 7.5 lakh crore, from the last year’s Rs 5.5 lakh crore. This led to a recent spike where India is consuming more iron and steel domestically, with little left for exports.   

The trend for the remaining two sectors is not alarming.   

To reduce dependence on imports, the Government of India launched programs such as the National Manufacturing Policy in 2011. Subsequently, schemes like Make in India (2014) and the Atmanirbhar Bharat Abhiyan (2020) were also launched.  

Additionally, several instruments were introduced. Schemes such as Focus Market Scheme (FMS) and Production Linked Incentive (PLI) were launched. Under FMS, the government is providing incentives on exports that can be used later to settle against future import duties on raw material to be used for exports.  

PLIs were given in the form of tax rebates, import and export duty concessions, and easier land-acquisition terms such as a cut in the land-registration tax. The idea is to enable foreign and domestic firms to invest in greenfield and brownfield projects.  

While the impact of PLI schemes is yet to be tested, policymakers are firefighting to stave off growing CAD. For instance, India continues to buy cheap oil from Russia. Additionally, India restricted export of 100 per cent broken rice. The idea is to use broken rice for producing ethanol, an alternative source of fuel.  

On July 1, the government increased customs tariffs on gold imports from 7.5 per cent to 12.5 per cent. To facilitate technology transfer from developed countries, foreign direct investment (FDI) in the pharma and medical-equipment sectors has been allowed up to 100 per cent through the automatic route. 

The move has already proved beneficial to some sectors. In the case of high-value-added pharmaceutical exports such as formulation and vaccines, India is doing well.  

The PLI scheme has seen foreign smartphone manufacturers such as Foxconn, Wistron, Nokia, Coral Telecom, to name a few, showing interest in investing in India. This is likely to enhance competitiveness and productivity growth for the Indian manufacturing firms and rein in the CAD. 

Interesting Sidelight of Imports

 Adani’s conglomerate is benefiting from India’s rush to import coal to ease a supply crunch, winning a huge majority of import orders from state power giant NTPC Ltd.

New Delhi-based NTPC has placed orders for 20 million tons of imported coal for the fiscal year ending March, of which almost 17.3 million tons have been awarded to Adani Enterprises Ltd.

NTPC has already received about 7 million tons of overseas coal at its plants this year.

My Comments on Adani and Coal Import

You know how expensive elections have become? AAP is in overdrive to remove BJP from GujaratRahul (Pappu), is reviving the Congress through, “Bharat Jodo”. Modi spent 8 years and crores in “Bharat Todo.” Even RSS and Gadkari are talking about poverty and unemployment. Now, poor Modi needs money for false propaganda to stay in power because slowly people are knowing the truth. This money has to come from Adani. What is a little increase in import bill for a great cause like staying in power for Modi?

References:

·       The Myth of the Fastest Growing Economy – Mises India

·       Explainer | India Hits $400 Billion Goods Export Mark: How Did We Do It & Why Is This a Big Deal? (thequint.com)

·       India’s September trade deficit widens; exports up 4.82% to $35.45 bn – BusinessToday

·       Current Account Deficit | Mythili Bhusnurmath: Current account deficit, jobless growth bigger worries for India: Mythili Bhusnurmath (indiatimes.com)

·       India’s current account deficit now highest in last nine years (nationalheraldindia.com)

·       coal import: Billionaire Adani is winning from India’s shift to import coal – The Economic Times (indiatimes.com)

–BY COL M M NEHRU

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