A Report On - India's Trade Deficit Trend (2006 onwards)

8/7/2019 A Report On - India's Trade Deficit Trend (2006 onwards)

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MACRO-ECONOMICS: PRINCIPLES AND POLICIESTERM II

FINAL PROJECT

INDIA¶S TRADE DEFICIT TREND

(2006 ONWARDS)

Submitted by:

Amit Jotwani ± 10DM-011

Amrinder Singh ± 10DM-012

Deepti Gupta ± 10DM-041

Abhay Agarwal ± 10IB-003

Anant Agarwal ± 10IB-009

Amit Aggarwal ± 10FN-010



TABLE OF CONTENTS:

Introduction

India¶s Trade Deficit: Since 2006

Detailed Trend of the Deficit since 2008

Analysis of the Trend

Conclusion

Bibliography



INTRODUCTION

The balance of trade (or net exports, sometimes symbolized as NX ) is the

difference between the monetary value of exports and imports of output in aneconomy over a certain period. It is the relationship between a nation's imports andexports. A positive or favourable balance of trade is known as a trade surplus if itconsists of exporting more than is imported; a negative or unfavourable balance isreferred to as a trade deficit or , informally, a trade gap.

The balance of trade forms part of the current account, which includes other transactions such as income from the international investment position as well asinternational aid. If the current account is in surplus, the country's net internationalasset position increases correspondingly. Equally, a deficit decreases the net

international asset position.The trade balance is identical to the difference between a country's output and itsdomestic demand (the difference between what goods a country produces and howmany goods it buys from abroad; this does not include money re-spent on foreignstock , nor does it factor in the concept of importing goods to produce for thedomestic market).

India reported a balance of trade deficit equivalent to 9118.0 Millions in September of 2010. India is leading exporter of gems and jewelry, textiles, engineering goods, chemicals, leather manufactures and services. India is poor in oil resources and is

currently heavily dependent on coal and foreign oil imports for its energy needs.Other imported products are: machinery, gems, fertilizers and chemicals. Maintrading partners are European Union, The United States, China and UAE.

India has a chronic deficit on current accounts. What bridges the gap between payments and receipts is mainly external aid (especially non-project assistance), tourism earnings, and remittances from Indians working abroad. Heavy imports of food grains and armament purchases caused a decline in India's foreign exchangereserves in the mid-1960s. An economic recovery from 1968±69, however , easedthe problem.

Although export growth remained strong, the current account deficit tripled from

1993±94 to 1995±96. The increase was attributed to a continuing surge in importsand higher debt service requirements. However , between 1995 and 1998 thecurrent account deficit shrank to about 1% of GDP due to increased textile exportsand a liberalizing trade regime.



In the early 2000s, India's exports to East and Southeast Asia increased, includingto Japan and South Korea. High growth rates were registered for textiles, chemicals and related products, engineering goods, and leather and manufactures.

INDIA¶S TRADE DEFICIT: SINCE 2006

An analysis of the major components of India¶s Balance of Payments as released by the RBI in the last five years is presented below:

Trade Account 2006 2007 2008 2009 2010

Exports 105.2 128.9 166.2 189 182.2Imports 157.1 190.7 257.6 307.7 299.5Trade Balance -51.9 -61.8 -91.4 -118.7 -117.3Trade Balance as% of GDP -6.20% -6.50% -7.40% -9.80% -8.90%

All figures are inUSD Billion

-150

-100

-50

0

50

100

150

200

250

300

350

Exports Imports Trade Balance Trade Balance

as % of GDP

2006

2007

2008

2009

2010



One notices trade deficit stabilizing at a high 9 per cent to 10 per cent of GDP; ithas doubled in the last four years; export growth slowing down actually it wasnegative last year; imports growing at a rate higher than exports and on a larger

base.

Until few years ago, our trade deficit used to be equal to our oil imports - that isour exports and nonoil imports used to be more or less equal. Thus the trade deficit

was essentially caused by our oil imports. This is no longer true. In the last fewyears, even without taking into account oil imports, we have been running a tradedeficit. This will only worsen further as our GDP growth rates climb higher incoming years.

UNCONTROLLED RISE IN OIL IMPORTS

Oil imports are rising without control. They are a function of demand for petro- products - petrol, kerosene, diesel, LPG, etc. With per capita incomes rising,

demand for all these products are rising. Subsidies on these products further support the rising demand. Also autos / CV sales are strong. Such a situation keepsus very vulnerable to rising global oil prices.

May be the Godavari Basin gas discovery will mitigate these adverse trends; but itis to be proved. Fortunately, the 10 per cent trade deficit is reduced considerably

by the invisibles - mainly software services and remittances. Here again, thedisturbing trend is the slowing growth rate in software services - in FY2010, software exports grew hardly by 10 per cent compared to the historical 20 per cent

plus growth rate. Whether remittances can remain robust in coming years withfewer Indian students going abroad needs to be seen.

Needless to emphasize, any slow-down in software exports and remittances willworsen our current account deficit dramatically as it has happened in FY2009 and

FY2010.



Trade Account 2006 2007 2008 2009 2010

Oil Imports -Customs 43.8 56.9 79.6 93.7 85.5 Non-Oil Imports -

Customs 105.2 128.8 171.8 210 193.2

All figures are inUSD Billion

HUGE RISE IN FDI AND FII FLOWS

Our Capital account flows - mainly loans, FDI & FII flows - comfortably fund our

current account deficit. As long as India remains a favorite destination for globalinvestors, we should not face serious problems in funding our current account

deficit. However , this should not deter the policymakers from addressing theworsening flow of trends in rising trade deficit and slowing invisibles.

Against such a macro backdrop, the rupee exchange rate is determined essentially by capital account flows ± if they are excessive as in 2007-08, rupee will rise

0 100 200 300

Oil Imports - Customs

Non-Oil Imports -Customs

2010

2009

2008

2007

2006



sharply and if they are inadequate as in 2008-09, rupee will depreciate. There areno strong trade account and current account fundamentals which can sustain arising rupee. At best what we can hope for is a range bound rupee (say Rs. 40 - Rs.50 to the U.S. dollar).The major advantage China has over India is her strong trade and current accountsurpluses year after year. That's how China has accumulated vast forex reservesover years which gave her the financial strength to undertake mega infrastructure

investments year after year while our trade and current account deficits restrict usfrom confidently planning and implementing such mega infrastructure investments.

DETAILED TREND OF THE DEFICIT SINCE 2008

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2010 -10362 -8966 -7825 -10420 -11292 -10554 -12930 -13060 -9118

2009 -5359 -3121 -3681 -6655 -7854 -9407 -7796 -8471 -6707 -8801 -9690 -1014

2008 -7955 -5688 -6320 -11857 -10757 -9770 -12595 -15764 -15347 -11738 -12325 -608

2010 2009 2008

-18000

-16000

-14000

-12000

-10000

-8000

-6000

-4000

-2000

0

1 2 3 Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep



ANALYSIS OF THE TREND

The general noted trend after a detailed study of the data is that while ithas been highly volatile through the moments, the trade deficit isgenerally increasing. The question is that is the increasing deficit (as a

percentage of GDP) a cause for worry?

The answer depends on the determinants of the deficit. For an expandingeconomy like India that is growing at more than nine percent per year , atrade deficit can arise from virtuous forces like heavy demand for rawmaterial and intermediate imports from a robust domestic industry. Thishas indeed been happening in recent years, with capital goods leadingthe import rally. If industrial imports push the deficit, then there is littlecause for concern.

The deficit can also widen due to exchange rate movements. Anappreciation in the value of the Rupee vis-à-vis other major currenciescan make Indian exports dearer and imports cheaper. Depreciation in theRupee will have the opposite effects. The eventual impact of exchange

rate movements on the trade balance will depend upon relative price-sensitivities of Indian exports and imports. Adverse impacts of suchexchange rate movements (if any) in a globalised world are usuallyshort-lived as market forces tend to impact interest rates and capitalflows in a manner that is self-equilibrating.

Enlarging deficits usually become a cause for concern if they are produced by chronic structural deficiencies. For developing countries,

structural trade deficits can be difficult to finance,

making themunsustainable after a point in time. This is because the chronic nature of the problems leaves little scope for policy intervention. The situationworsens if the deficiencies are accentuated by adverse circumstances. Atypical example is the dependence on oil imports. The dependence oncrude oil imports is chronic for most industrializing developing



countries. The problem is also structural as their current resourceutilization pattern does not contain alternatives to imported crude.Furthermore, in a situation of unabated rise in oil prices, like now, the

problem tends to get compounded.

A closer look at the recent BOP numbers reveals the following:

y India¶s exports increased from US$128.1 billion in 2006-07 toUS$182.2 billion in 2009-10. This year-on-year increase of US$54.1 billion was superseded by imports, which increased by asmuch as US$108.8 billion from US$190.7 billion in 2006-07 toUS$299.5 billion in 2009-10. The sharp rise in imports impacted

the final size of the trade deficit.

y One of the possible reasons behind a progressively-widening tradedeficit could be a decline in exports accompanied by an increase inimports. But it has not been so in India¶s case. Exports grew by23.7 percent in 2007-08, which was higher than their growth of 21.8 percent in 2006-07. But the import growth of 29.9 percent in2007-08 was far higher than the 21.8 percent growth in the

previous year. So the rise in trade deficit can be attributed to amuch faster rise in imports compared with exports.

y Imports can be divided into two broad groups: oil and non-oil. TheBOP statistics do not disaggregate oil imports as a separatecategory. According to the data made available by the DirectorateGeneral of Commercial Intelligence and Statistics of the Ministryof Commerce, India¶s oil imports during 2007-08 were US$77.04

billion. This represented an increase of 35.3 percent over US$56.9 billion in the previous year. Further , the year-on-year growth in oilimports in 2007-08 was higher than the growth of 30 percent in2006-07. In sharp contrast, non-oil imports, despite growing at ahigher rate of 23.5 percent in 2007-08, compared with 22.2 percentin 2006-07, show a much lower rate of growth than oil imports.



There is no doubt that high growth in oil imports has been the mainfactor behind the sharp rise in imports.

y It is common knowledge that global crude prices are rising at anunprecedented rate. The prices have substantially inflated India¶simport bill. India¶s crude imports comprise a basket of threevarieties ± Brent, Dubai and Oman. Given the composition, even if one among the three experiences sharp increases in prices, theoverall price of the basket does not get affected by the same extent.But during last year , all the three crude varieties saw their prices

rising fast. The average price of the Indian basket varied betweenUS$65.5 and US$99.8 per barrel, yielding an average price of US$79.5 per barrel for the year. This was a steep jump vis-à-visUS$62.5 per barrel in 2006-07. Interestingly, the volume of oilimports experienced a lower growth of 11.8 percent in 2009-10vis-à-vis 14.5 percent in 2006-07. Thus, the increase in oil importswas primarily value-driven and not volume-driven.

y Excluding gold and silver ,

among other non-oil imports,

capitalgoods experienced the fastest growth in 2009-10. Edible oil, fertilizers, iron and steel, chemicals, textile and coal were the other leading imports. It must be noted that along with crude oil, global

prices of most of these imports too have gone up. Thus, the impact

0

50

100

150

200

250

Oil Imports - Customs Non-Oil Imports

- Customs

2006

2007

2008

2009

2010



of the world commodity price boom has been felt across the board by Indian imports.

High crude prices, therefore, have been the main determinants of India¶srising trade deficit.Given India¶s chronic dependence on oil imports, with the latter accounting for almost one-third of the country¶s total imports, the Indianeconomy¶s import bill and trade balance will continue to remainsensitive to movements in world oil prices.

Assuming that oil prices will continue to rise in the near future, will the

trade deficit become unsustainable? This depends on the Indianeconomy¶s capacity to finance the deficit. The high trade deficit hasresulted in an increase in the current account deficit as well. From 1.1

percent of GDP in 2006-07, the current account deficit has increased in2009-10. However , the balance of payments is yet to come under stress, due to a healthy capital account surplus. The current account deficit in2009-10 was more than compensated by a capital account surplus. Theresult was net addition of more than US$90 billion to India¶s foreignexchange reserves, which have now risen to more than US$300 billion.

Year

Current Account

Balance

Percent

Change

2006 ($12,950,000,000) -364.45%2007 ($26,400,000,000) 103.86%

2008 ($12,110,000,000) -54.13%

2009 ($37,510,000,000) 209.74%

2010 ($31,540,000,000) -15.92%





Documents

A Report On - India's Trade Deficit Trend (2006 onwards)