How to reverse India's trade deficit

A more effective promotion of domestic manufacturing and mining could significantly reduce the trade deficit in key sectors, says T N Ninan.

Illustration: Dominic Xavier/Rediff.com.

So what ails India’s exports, which have been stagnant these last five years even as the deficit in merchandise trade has remained large, despite the fall in oil prices?

India has a surplus in the trade in agricultural items as well as in services trade (mostly software). It also has a net surplus when it comes to financial transfers, like remittances from non-residents.

Among the deficit areas, as is well known, the biggest is in energy (oil, gas and coal), which accounted in 2015-16 for well over half the total deficit in goods trade of $118 billion. The rest of the deficit was almost entirely explained by the deficit in trade in manufactured items.

This broad category can be defined and grouped in various ways. As it happens, India has a trade surplus in a knowledge-intensive area like drugs and pharmaceuticals, and also in its areas of traditional strength, such as in the broad textiles segment and in leather.

But if you take just core manufacturing (engineering, chemicals and electronics), exports in 2015-16 totalled only $78 billion, whereas the imports of these items were two-thirds bigger at $130 billion.

These numbers need to be broken down further. Because, interestingly, the country is not badly off when it comes to trade in engineering goods -- exports totalled $60 billion, while imports were smaller at $53 billion.

It is a different story when it comes to chemicals -- imports at $36 billion were three times exports of $12 billion. The imbalance was greatest in electronics -- imports of $40 billion swamped exports of $6 billion.

Two other problem areas are mining, where the import of coal and non-ferrous metals totalled $25 billion, and fertiliser ($8 billion).

It goes without saying that every country has areas of strength and weakness when it comes to trade, and no country can expect to do equally well in everything.

Vijay Kelkar argued more than three decades ago that, for whatever reason, India did relatively well in batch-production (like engineering goods) and poorly when it came to continuous-process industries like chemicals.

Though companies like Reliance have shown they can do perfectly well when it comes to exporting refined petroleum products, and some speciality chemical companies have notched up export successes, Kelkar’s broad finding has stood the test of time.

That leaves the electronics industry, where the lack of exports is striking and the trade imbalance the most glaring. Surely, there is scope here for leveraging the attractions of a large domestic market to encourage suppliers overseas to set up local manufacture.

Chinese companies have started assembling mobile phones in India, and Apple might do so soon. If this progresses to the domestic production of components and then sub-assemblies, it would set the stage for becoming an export base, as has happened with small cars.

Beyond these, the issue to examine is the role of government policy. It is well understood that the exports of yarn, textiles and garments could have been very much more than the $32 billion achieved in 2015-16.

One of the factors that have stood in the way is labour policy, which is now being addressed in phases.

Similarly, when it comes to the growing reliance on imported fertiliser, one of the manifest causes is government policy; there has been virtually no investment in the sector for a decade or more.

In the energy sector, when Cairn claims that it can account for half the country’s production of oil, or when coal imports are growing, the question has to be asked whether preference for the public sector is standing in the way of increasing domestic output.

As for the large imports of non-ferrous metals, the issue is that conflicts over environmental issues have not been resolved satisfactorily; the consequence is that investment in the mining sector has suffered.

The short point is that more effective promotion of domestic manufacturing and mining could significantly reduce the trade deficit in key sectors.