Trade Deficit Worry

Why India should be seriously worried…

India’s trade deficit numbers are out and there is room for some real concern. The overall exports for the year were $310 billion and the imports were $448 billion, leaving a trade deficit of $138 billion. That approximately translates into a trade deficit of $11.5 billion per month. But the real story lies in the break-up of these numbers.

Non-oil imports are a worry…

Of the total imports of $448 billion, non-oil imports accounted for $309 billion. In other words, the volume of non-oil imports for the year was equal to the overall exports reported during the year. This effectively means that the oil imports contribute to the entire fiscal deficit. Obviously, the major chunk of non-oil imports was accounted for by gold imports. This has been a recurring problem for India as the imports of non-productive gold is accounting for a major chunk of non-oil imports. It is here that one was hoping for some speedy announcements on the Local Gold Schemes, but nothing has been forthcoming on this subject. Leveraging India’s domestic gold will go a long way in reducing our need for imported gold and do wonders for our trade deficit. The next question is whether the regulator was a little hasty in relaxing our gold curb schemes and the mandatory export schemes. It is hard to say, but only time will be able to justify the wisdom of these moves. One only hopes the price is not too steep.
So, what about oil imports?

Oil imports are down 16% for the year, but that is hardly surprising considering that oil prices are down over 55% since the middle of June 2014. The bigger story is that India’s exports are just about sufficient to pay for our non-oil imports. The oil imports have no export cover and have to either depend on the support of forex reserves or hot portfolio inflows. With an 80% dependence on oil imports, this is hardly a great situation to have. One can only imagine, what will be the extent of trade deficit if the oil prices were to move back to 2014 levels. At least, the way US shale rigs are shutting down, it looks highly likely that oil prices may start hardening once again.

Can “Make in India’ help?

When you look at these scary numbers, suddenly Modi’s “Make in India” campaign makes a lot of sense. Back in 1992, India and China had roughly the same level of GDP. Today, China’s GDP at $10 trillion is roughly 5 times that of India. China achieved this by emerging as the preferred factory to the world. Not only has China consistently maintained a trade surplus but also sits on a forex chest of $4 trillion. India has a long way to go in terms of policies, business-friendliness, infrastructure, labor policy etc. But the time to start is now. After all, long term problems do call for long term solutions! ©

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