Structural faultlines in trade numbers

On the face of it, the numbers couldn’t be better. True, the gap between imports and exports widened, but that is to be expected in a growing economy. India exported $38.19 billion worth of merchandise goods in April 2022. This is nearly a fourth more than during the same month a year ago, when the economy was recovering from the first wave but just before the second wave of Covid hit.

What’s more, the April numbers are more or less near the record $40.38 billion of exports achieved in March, the highest ever one-month figure till date. The financial year-end surge helped take overall merchandise exports in 2021-22 to an all-time high of $417.8 billion.

On the other hand, imports are growing at an even faster clip, as demand picked up and most industries got back to pre-Covid levels of production. As a result, the trade deficit widened to $20.07 billion. For the 12 months up to April, the deficit in merchandise trade has crossed $200 billion.

That is a bit of a concern, but as long as the trade deficit is matched by strong economic growth, it is actually a good thing. The US, for example, ran a trade deficit throughout the 19th Century — but massive capital investments and infrastructure development led to a booming economy, and the world’s highest per capita GDP by 1900, making it the world’s richest and economically strongest nation — a position it has held for more than a century since.

Nature of imports

No, the problem is not with India’s rising imports or the widening balance, per se. The problem is with the nature of the surge in imports and the composition of the trade imbalance. True, unproductive gold imports fell sharply in April — but that is more a factor of the Indian wedding season than a structural change in India’s love for the yellow metal.

On the other hand, crude imports shot up substantially, driven by the spike in energy prices caused by the Russia-Ukraine war. A searing hot summer which set in a month early also caused a surge in demand for power, which in turn led to a surge in demand for coal. Imports of crude oil and petroleum products surged more than 81 per cent in April, while coal and coke imports surged nearly 137 per cent.

A look at the government’s commodity-wise import numbers for financial year 2021-22 highlights the kind of structural problems with our trade. We have the world’s fifth largest proven reserves of coal — almost a tenth of the world’s supply — yet we imported more than $31.7 billion of coal and coke last year. We are the world’s second largest producer of raw cotton — yet we imported $559.47 million worth of cotton last fiscal.

Imports of electronic goods surged more than 35 per cent, past the $73 billion mark, putting it behind crude oil as our biggest import item. We rank second worldwide in farm output — yet agricultural imports are putting a serious dent in our balance sheet. In 2021-22 we imported $18.9 billion worth of vegetable oil, $2.2 billion of pulses, and a staggering $2.6 billion worth of fruits!

Unnecessary imports

This is happening because we have been unable to fix the structural issues which dog our key sectors, relying instead on imports for quick fix solutions. Take coal, for instance. It is mind boggling that we are facing a power crisis at the moment because we are unable to import sufficient coal to run our power plants — while sitting on a tenth of the world’s supply! True, there are quality issues — but these could have been fixed with technology upgrades in mining, adding beneficiation infrastructure and tweaking boiler technology to achieve higher thermal efficiencies with lower grade coal. We have the technological capability to do it, but we haven’t done so.

Take the criminal $2.6 billion of hard-earned forex we are spending on fruits. India has the widest agro-climatic diversity in the world. Simply put, there is not a single fruit or vegetable that is climatically impossible to produce somewhere in India. Yet, some of the agro-climatically suitable zones for growing exotic and temperate zone fruits — such as the north east and the extended lower Himalayan ranges — are so badly cut off from markets that fruit simply rots on the branch there, rather than being profitably sold in domestic or global markets.

We talk up a storm about doubling farmers’ incomes but we actually do nothing about it. Why bother when we can import from “enemy” nation China, and get consumers to pay top dollar for it to boot!

Take the much touted success in mobile phone manufacturing. True, made in India handsets have shot up — but for every $100 worth of India-made phones sold, about $80 worth of components are imported. The tale is repeated elsewhere, in virtually every one of our “strong” export sectors.

Take textiles, fabrics and apparel. India is ranked second in the world in textiles, behind China. But this distorts the reality. China hogs more than 51 per cent share in global textile output, while India’s is just 6.9 per cent. And despite being one of the world’s biggest producers of both fabric and garments, we imported more than $2 billion worth of textiles and made-ups last year. Neighbouring Bangladesh is the biggest exporter of denim products to the EU and the third biggest — after China and Vietnam — to the US. Even Pakistan exports more denim than India!

Our import numbers, in fact, are a very good proxy for the structural weaknesses that plague our economy. Rising imports of crude cannot be helped — it is a resource we lack in sufficient quantity though even here, we have not exploited the resources we have. But everything else points to an inability to address root causes. The failure to address problems known for decades or more is the biggest failure of India’s policymakers and planners. And an indicator of just how much influence over policymaking is exerted by vested interests.