Relevance: GS-3: Indian Economy, mobilization of resources, changes in industrial policy and their effects on industrial growth.

Key phrases: India’s exports, merchandise, Net exports, Free trade pacts, Logistics costs, Support for MSMEs, $5 trillion economy, India’s tariff policy.

Why in News?

• Sharp increase in exports of engineering goods, petroleum products, gems & jewellery and chemicals pushed up India’s total goods export in February by 21.88 per cent (y-o-y) to $33.81 billion, per preliminary data released by the government on Wednesday.

India’s exports:

• With total goods exports in the April-February 2021-22 period at $374.05 billion, an increase of 45.8 per cent over the same period last year, exporters are closer to meeting the target of $400 billion set by the Commerce & Industry Ministry for FY22.
• The on-going conflict between Russia and Ukraine, however, is a growing concern for sectors such as engineering goods, which have a market in Russia, due to uncertainty over payments as well as rising freight costs.
• The value of non-petroleum exports in February was $29.70 billion, registering a growth of 18.04 per cent over the year-ago period.

Trade deficit widens

• Goods import increased 34.99 per cent to $55.01 billion, widening trade deficit to $21.19 billion from $13.12 billion in February 2021. The increase in imports is attributable to sectors including petroleum, electronics, gold, coal and chemicals.
• Imports in April 2021-February 2022, at $550.12 billion, were 59.21 per cent higher than imports in the same period last fiscal, almost doubling the trade deficit to $176.07 billion compared to $88.99 billion in the comparable period of 2020-21.
• The value of non-petroleum imports came in at $39.96 billion with a growth of 26 per cent over non-petroleum imports in February 2021.
• Exports took a beating in 2020-21, declining 7 per cent to $292 billion, with Covid-19 disruptions affecting manufacturing, both globally and within the country. However, with a revival in global demand, exports have been on a growth track in the on-going fiscal.
• With monthly exports crossing the $30-billion mark for the 11th consecutive time during the fiscal, we are on course to cross the $400-billion exports target for the fiscal,” said A Sakthivel, President, FIEO. This would translate into a growth of over 40 per cent over exports in the previous year.

Global situation, a challenge

• While the engineering goods sector is on track to achieve its export growth target of $107 billion in 2021-22, the Russian invasion of Ukraine is proving to be a challenge. “Among the CIS countries, Russia is the biggest export market for Indian engineering goods. Exclusion of Russia from the SWIFT payment system would, therefore, mean delayed payment realisation for exporters.
• The ongoing geopolitical crisis has already pushed up the prices of key commodities, especially crude and metals. “The shipping cost, which has already been going through the roof, would further hurt the exporters. In case the crisis continues, there could be spillover effects elsewhere, too, and that means impact on trade deepening.

What should India do to reduce Trade Deficit?

The trade deficit can be lowered in several ways which are controlled by the Union Budget and other trade policies. Here are some of the ways one can tackle the trade deficit:

• Depreciating currency value: Currency devaluation is a deliberate downward adjustment of the value of a country's currency against another currency. Reducing the value of the Indian rupee would make Indian exports more competitive, increasing demand for Indian products. However, this would make imports more expensive and this measure has several other unpleasant side effects such as inflation and this measure is dependent on the elasticity of demand and hence is not an easy solution for decreasing trade deficit.
• Taxing inflow of capital to curb borrowing for consumption: Making excessive borrowing for consumption more expensive by placing taxes on non-FDI investment inflow of capital is a measure to close the imbalance but economists worry that controls on capital could reduce investment and alter prices of assets among other unpleasant effects.
• Protectionist quotas: Setting quotas on imports could reduce the number of goods imported into the economy but as this is a barrier to free trade, it could be a violation of WTO rules. Further, other countries might retaliate by placing quotas on Indian exports and other measures that may be detrimental to Indian exports.
• Boosting export by providing incentive like interest equalisation scheme.

Way Forward:

• To achieve the ambitious target of becoming a $5 trillion economy, India’s FTP must be geared up to achieve $1 trillion exports. Raising exports would however mean that the country’s attitude towards free trade needs to change from the current protectionist stance.
• The government had announced a slew of measures to support exports, the need of the hour was to soon announce an extension of the interest equalisation scheme, extend the input duty reimbursement scheme RoDTEP to EOUs, SEZ and Advance Authorisation and also expand usages of RoDTEP and RoSCTL scrips.

Source: The Hindu BL

Mains Question:

Q. “With achieving the target of $400 billion export economy, India has to tackle the challenges of trade deficit.” Critically Examine the Examine.