August trade gap is an early warning of currency and forex concerns – The Wire | Jewelry Dukan

India’s trade data for August shows an unusual bias.

While imports grew a whopping 37%, exports posted negative growth of 1.5% and the trade deficit for August has widened to about $28.7 billion from $11.6 billion in August 2021 August is worrying as a widening trade and current account deficit would weaken the currency and dwindling foreign exchange reserves historically accumulated by the RBI.

The fact that exports are contracting in recovery mode cannot be explained structurally, which is reflected in higher imports of capital goods and intermediate goods. There is always a strong correlation between imports and exports. For example, during the economic boom from 2003/04 to 2008/09, imports grew at an average annual rate of 26% and exports at 22%. Of course, the world economy was in better shape then and global trade and investment flows were robust.

Then, after the financial crisis and global recession, came a period of relative de-globalization of trade and investment. During this longer phase – from 2011 to 2019 – trade flows slowed down considerably. From 2013 to 2019, India recorded annual growth in its imports of almost 4-5%. Even exports stagnated in the low single digits throughout this period.

The point is that imports and exports usually have a positive correlation. But oddly, the August data show quite a wide divergence, with imports growing 37% and exports falling -1.5%. That’s definitely unusual.

This can have several reasons. One put forward by Trade Minister BVR Subrahmanyam is that exports have been sluggish because India has restricted a large number of export items such as diesel, gasoline, aviation fuel, wheat, steel and iron pellets. This week, a 20% export tax was levied on non-basmati and non-parboiled rice, which account for over 80% of India’s total rice exports of 21 million tonnes.

There may be a political reason to impose export restrictions on wheat and rice. Prime Minister Narendra Modi is likely concerned that rampant exports could disrupt domestic stockpiling of grain supplies needed ahead of the 2024 election if food prices spiral out of control.

Similarly, he may also fear that higher steel prices could raise the cost of dedicated low-cost housing flagship programs like Prime Minister Aawas Yojna. While these concerns may be legitimate, the net effect of restrictions on the export of a large number of items, including energy, is a distortion in the equation between imports and exports.

Exports have also fallen as other emerging economies in Africa and Latin America that import from India are themselves facing harsh currency restrictions due to the dollar’s inexorable rise following the Ukraine conflict. For example, India is the largest exporter of two-wheelers to Africa, but this year exports of Bajaj Auto, Hero Honda and TVS have shrunk by 15-20%.

The emerging global recession is also having a serious impact on exports, but our domestically driven infrastructure growth is keeping imports alive. In this scenario, India would have to watch closely the widening gap between its rising imports and shrinking exports. It should be noted that from April to August this year, India recorded negative export growth of 35% with its largest trading partner China, although imports from China continue to grow by 28%. Another revealing example of the huge divergence between export and import growth.

While energy imports are inevitable, India should keep a close eye on imports of capital goods and intermediates used in large industrial and infrastructure projects. These infra-related imports can deplete dollar resources without generating immediate export growth to generate the necessary dollar revenues. This discrepancy could lead to currency instability and excessive pressure on foreign exchange reserves in the short or medium term. Both the Center and the RBI must be on high alert given the divergence between import and export growth. The August trade data is a warning sign.

This article was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been republished here. To subscribe to The India Cable, click here.

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