The trade push

India should focus on exports for growth

The Reserve Bank of India’s (RBI’s) assessment of the economic situation appears closer to reality than the government’s reading, which expects a V-shaped recovery from the Covid-induced contraction in the economy. RBI Governor Shaktikanta Das, in an address on Wednesday, noted that the recovery was not fully entrenched and, in fact, upticks in recent months seemed to be levelling off in some sectors. The recovery is likely to be gradual as the rising infection continues to affect the pace of economic activity. Aside from other high-frequency indicators, the monthly trade data released this week also suggests that economic revival will take time. After recovering for three months, the contraction in exports increased in August. Meanwhile, the rate of contraction eased in imports from 28.4 per cent in July to 26.04 per cent in August, which resulted in a higher trade deficit. The level of contraction in imports indicates that demand continues to remain weak, and the increase in the trade deficit is largely driven by gold imports.

Expansion in the trade deficit would perhaps help in macroeconomic management in the near term as it will reduce the balance of payments surplus and allow the RBI to lessen intervention in the currency market to some extent. This will open up some space for the central bank to intervene in the bond market. However, in the medium term, India will need to focus on exports for sustainable growth. The global merchandise trade is estimated to have declined by over 18 per cent in the second quarter of 2020. But as the global economy stabilises, and the outlook improves on the trade front, India will need to capitalise on increasing exports. Domestic demand could remain weak in the coming years owing to lower government expenditure as it balances the budget after an inevitable large expansion in deficit and public debt in the current fiscal year.

To be sure, pushing up exports would need focused policy intervention from both the government and the RBI. Mr Das in his address rightly emphasised the need for increasing India’s participation in the global value chain (GVC). Large volumes of international trade now happen through the GVC. However, India’s participation in the GVC remains low and, according to estimates, has declined in recent years. This is not surprising, given the protectionist bend of India’s trade policy. Higher participation in the GVC needs a seamless movement of goods across borders. Higher tariffs and policy uncertainty would not allow India to become an integral part of the GVC.

Thus, it is important that the government reviews the trade policy and makes necessary changes to facilitate India’s participation in the GVC. In this context, India will do well to actively review its position on joining the Regional Comprehensive Economic Partnership. Further, random policy changes, such as the recent ban on onion exports, affect India’s position as a dependable supplier. Meanwhile, the RBI will need to ensure that the rupee is fairly valued. The latest projections of the US Federal Reserve indicate that the policy rate will remain near zero till 2023. This would result in a sustained flow of foreign funds into countries like India. Therefore, the RBI will need to be watchful and avoid unnecessary currency appreciation. A significant overvaluation will not only affect exports but can also create macroeconomic imbalances and increase risks to financial stability.