How crude is losing ground as the biggest strain on India's forex reserves

Electronics, machinery, iron & steel and coal together accounted for just half of India's petroleum import bill in FY14. In FY19, they matched the value of oil imports

With crude prices soaring in global markets after the drone attacks on Saudi Aramco’s Abqaiq refinery, the world’s largest oil processing facility, questions have once again emerged on how prepared India is to face the consequential pressure on its forex reserves. Basically, has the nature of imports created bigger challenges for the Indian economy than the foreign exchange crisis of 2013-14, or have these challenges diminished?

The bar chart below is quite illustrative in this respect. It is drawn from RBI data on which the author has added in the percentages. Going by this list, the top five items India imported by value in 2013-14 were petroleum goods, electronics, gold, machinery (both electrical and non-electrical), pearls and semi-precious stones. 

Compare this with the list drawn from 2018-19. Petroleum still dominates the import basket, which is quite along expected lines. But now the pecking order has begun to change. The next four largest imports for India are electronic goods, machinery, gold and then coal and pearls, which are at almost the same rank. The only newcomer seems to be coal. But that does not tell even half the picture. The key imports for India in FY19 are the more value-added items.

So, racing far ahead of the import of crude are the imports of electronic products, coal, machinery and of iron and steel. The cumulative annual growth rate of each of these imports, as the table shows, is between 7 per cent and 11 per cent. And some of the fastest growing imports of those value-added items are sourced from China, which means it will be even more hard for India to clip its trade deficit with it. The imports of petroleum products, in comparison has decelerated in the same period. Imports of both gold, pearls and chemicals has hardly moved up, averaging an annual growth rates of just 2 and 3 per cent. 

The scale of change in the basket of imports is consequently massive. The import of coal has risen by a CAGR of nearly 10 per cent in this period, that of electronics by an even larger 11 per cent. To get a better sense of the importance of the new entrants, just consider that electronics, machinery, iron and steel and coal between them accounted for just about half the size of India’s petroleum import bill in FY14. In FY19, they have jumped ahead to match the country’s total petroleum bill.

How do these changes impact the Indian economy? India is clearly importing a lot more value-added items now, instead of primary products like pearls and gold. Even though coal is a primary material, in terms of composition, the quality of the mineral being imported is far superior to that of domestic supply. So is that of iron and steel. With the economy depending a lot more on clean coal due to environmental challenges, these types of imports will only rise. 

All these changes have happened in just five to six years. The total value of imports of both coal and electronics could become twice their FY14 figures by the end of this financial year. So while RBI Governor Shaktikanta Das has said India’s current account could remain under pressure if oil prices remain high, there are other pressure points building up for the economy too, at a rapid clip. 

The changes have implications for a larger swathe of sectors in the economy than the unidimensional impact of crude. For instance steel prices in the economy could rise on external conditions much more readily than they did a few years ago. In a commentary on the sector, India Ratings & Research has acknowledged the possibility of “increased import risks especially from Free Trade Agreement (FTA) countries such as Japan and South Korea due to adverse domino impact of the slowing global growth and continuing trade frictions. Furthermore, raw material availability and price risks may escalate in 4QFY20 if the uncertainty over iron ore mine auctions prolongs”. 

Similarly a report by Care Ratings on coal imports notes: “Coking coal imports constitute 5 to 7 per cent of India’s total coal consumption. Imported coal is procured on short-term/medium-term contracts by manufacturers of steel. Thus any transmission of fall/rise in global coal prices takes a longer duration to get reflected on domestic wholesale coal prices”. Aggregate Indian imports have not grown much since FY14 but its components have clearly shifted towards value-added products, belying a supposedly increasing manufacturing strength of the economy.