As exports face headwinds from the western economies, particularly in debt-ridden Europe, India’s balance of trade or trade deficit is projected between USD 262 billion and USD 280 billion in the fiscal 2012-13, according to trade body Assocham.
Trade deficit is the shortfall between how much a country needs to pay for its imports versus how much it is able to earn from its exports to other countries.
In other words, if it spends Rs 100 on buying items from abroad, but other countries buy only Rs 80 worth of goods from the country, there is a deficit of Rs 20.
Trade deficit implies that the country has to be cut down on imports.
However, like in India’s case, the country may divert dollars and other foreign money that it gains from other avenues — such as long-term investments into the country — to pay for its imports. Imports have to be paid for using foreign exchange — dollars, euros etc. — only. India ran out of cash once in 1990-91, when it did not have foreign currency even to pay for food and oil imports.
In the fiscal 2011-12, the country’s merchandise imports totaled USD 488 billion against exports of USD 303 billion leaving balance of trade of USD 185 billion. The target was about $130 billion.
In comparison, India has a total reserve of about $290 billion of foreign currency which can be used to fund the gap. However, the foreign reserves are down about $19 billion compared to a year ago.
India’s trade deficit increased despite the fact that they were up 21 per cent as there was some good performance in the initial months of the 2011-12 fiscal. But, imports shot up by 32 per cent thanks mainly to high crude prices and rising gold and silver imports.
Import on these two items itself was a whopping $217 billion, accounting for over 44 per cent of the country’s total import bill of USD 489 billion, said The Associated Chambers of Commerce and Industry of India (ASSOCHAM).
“Out of the three likely scenario plotted by ASSOCHAM, the most likely seems to be the one where imports would grow by about 25 per cent in dollar terms and exports increasing by about 15 per cent. This would leave the country with a BoT gap of USD 262 billion,” said Mr Rajkumar Dhoot, MP and President, ASSOCHAM.
“In such a scenario, exports would grow up to USD 348 billion but import shipments would increase to USD 610 billion. Even assuming the moderate GDP expansion of 7 per cent, the crude oil imports would remain the biggest import item, as the economic activity would be required to be fuelled by the conventional sources of energy,” Dhoot added.
Despite the Budget proposal of doubling the customs duty to four per cent on gold, imports under this head would continue to exert pressure on the country’s bill. The country’s social habit in terms of gold being one of the biggest purchases during the marriages is not going to change over night, even though the middle class families find it hard to manage, Assocham said.
“The problem in terms of rising imports in dollar terms is expected to be worsened by the continuing pressure on rupee, which has lost well over 15 per cent in value since September. Rupee would remain weak, if efforts on war-footing are not taken to make India an attractive investment destination both for the foreign direct investment (FDI) as also for the portfolio investment through the foreign institutional investors (FII) route,” the trade body added.
The trade body warned that the events beginning to unveil after the Budget seemed to be pulling the country in the reverse direction.
“The FIIs have pulled out Rs 777 crore in April after staying bullish on India for the first few months of 2012. They were disappointed by several events and policy issues, including the General Anti-Avoidance Rules (GAAR) and the retro-active tax proposals. Thankfully, as suggested by ASSOCHAM, Finance Minister Mr Pranab Mukherjee has deferred the GAAR implementation by a year.
On the other hand, while the foreign direct investment (FDI) figures might look attractive in terms of growth, the base is so low that they do not mean much. In all, India attracted FDI of about USD 28.5 billion during April-February period of 2011-12 fiscal. The year-end figure could be in the range of USD 30 billion,” it noted.
“Here too, potential areas which can catapult global investor confidence in India have remained on the backburner due to lack of political consensus,” said the ASSOCHAM chief.
That leaves the country look up to the services exports for retrieving the Balance of Payment (BoP) situation. India earns about $110 billion by exporting its services — such as the work of software and BPO professionals working in India — every year.
“The services exports largely generate business from the US economy, which is not showing definite signs of pick-up. Moreover, there are issues like protectionism and more and more road blocks being created in the export of Indian IT services to the US – be it visa fee hike or difficulties being faced by the Indian firms in getting short-term visas for their staff,” the trade body noted.
ASSOCHAM president has suggested the government to go for all out domestic policy reforms. Whether it is Goods and Services Tax (GST), or Direct Tax Code (DTC) or banking sector reforms, not much time can be lost. These measures will boost confidence both in the domestic market as also for exporters as their transactions costs would come down making them competitive.
Speed up Free Trade Agreement with the European Union. Exports of merchandise will get a boost in terms of getting improved market access in products like textiles, engineering, gems and jewellery.