Trade challenges

Stable numbers, but no structural improvement

The numbers for India's merchandise trade during April were published by the commerce ministry on Friday. These come against a backdrop of significant shrinkage in the economy's habitual trade deficit over the second half of 2013-14. The deficit for the whole year came in at about $139 billion, compared with $190 billion in 2012-13. The narrowing trend was a significant contributor to the stabilisation of the rupee after the massive depreciation between May and September 2013. The April numbers suggest that the pattern is likely to persist. Exports grew by 5.3 per cent year on year in US dollar terms, reversing a rather worrying decline in March and a notch above the four per cent growth registered during 2013-14. In contrast, imports declined by 15 per cent year on year, a significantly higher rate of decline than the eight per cent seen during the previous year. The deficit came in at $10 billion, much lower than the $17.7 billion clocked in April 2013. Overall, the numbers do reassure that the pressure on the rupee from the current account will be considerably lower in the year ahead than it was in the year gone by.

This is by no means the outcome of enduring structural measures. Some of the narrowing of the deficit has come about because of a depreciated rupee, which is all to the good. The exchange rate is a source of competitiveness for domestic producers, both exporters and those who compete against importers in the domestic market. These producers have apparently been able to extract some benefits from the lower rupee. However, the persistent decline in imports also reflects weak domestic demand conditions. If the new government engineers a growth revival in the short term, there will be an adverse impact on the trade deficit, which will need to be addressed. Another significant contributor to the narrower deficit is the dramatic decline in gold imports, at least those coming through official channels. It is widely expected that the import duty hikes and quantitative restrictions that were imposed last financial year will have to be rolled back sooner or later, at which point imports may surge again. No serious efforts have been made in the mean time to wean Indian savers away from gold. As regards iron ore and coal, both major contributors to the widening current account deficit over the past three years, there are positive moves on reviving exports of the former but no movement on the latter. Burgeoning coal imports, without which power generation is threatened, mean that, in order to keep the trade deficit in check, either exports have to surge, which is unlikely in the current global scenario, or other imports have to be compressed, which will clearly impact domestic producers.

Essentially, the combination of a lower rupee and measures to reduce gold imports has bought the economy some time, but no more. This time must be utilised as effectively as possible to bring about more enduring changes in the trade environment, which will allow the economy the space to accelerate growth without immediately hitting up against a current account constraint.