Structural Fault Lines In Trade Numbers : Daily Current Affairs

Relevance: GS-3: Indian Economy, mobilization of resources, growth, development and employment.

Key Phrases: Imports, Commodities, Trade Deficit, Merchandise Trade, Capital Investments and Infrastructure, Electronic Goods, Agricultural Imports, Structural Issues, Boiler Technology.

Why in News?

The surge in imports of commodities where we have strong domestic presence indicates failure to exploit our own resources.

Context:

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.
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 i.e. a position it has held for more than a century since.

Nature of Imports:

The problem is not with India’s rising imports or the widening trade balance. The problem is with the nature of the surge in imports and the composition of the trade imbalance.
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.

Some Structural Problems With Our Trade:

Coal :With 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.
Cotton: Though being world’s second largest producer of raw cotton — yet we imported $559.47 million worth of cotton last fiscal.
Electronic goods:These surged more than 35 per cent, past the $73 billion mark, putting it behind crude oil as our biggest import item.
Farm output: 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!

Issues with These Imports:

Unnecessary imports are happening because we have been unable to fix the structural issues which dog our key sectors, relying instead on imports for quick fix solutions. like.
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 i.e world’s fifth largest proven reserves of coal.
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.

What Should Government Do?

Taxes and quotas: Governments can decrease excessive import activity by imposing tariffs and quotas on imports. The tariffs make importing goods and services more expensive than purchasing them domestically. Imposing tariffs is one way a country can work to improve its balance of trade and boost domestic industries.
Subsidies: Governments provide subsidies to domestic businesses in order to reduce their business costs. This helps bring down the price of domestic goods and services, hopefully, encouraging consumers to buy domestic rather than imported goods. By enabling domestic producers to produce goods less expensively and, thus, lower their prices, subsidies may also increase exports as the cheaper goods become more attractive to foreign buyers.
Currency devaluation: Another method of increasing exports and decreasing imports is by devaluing the domestic currency. Governments devalue their currency with the aim of bringing down the prices of domestic goods and services, the ultimate goal being to increase net exports. The currency devaluation also makes purchasing from other countries more expensive, thus discouraging imports.
To promote indigenous manufacturing of electronic goods, we need steps includes rationalization of the tariff structure with extension of differential excise duty dispensation to mobile handsets/tablet computers and specified electronic equipment, PLI scheme for items for supply to mobile handset manufacturers, etc.
In regrading coal, it is true that there are quality issues in India. 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.

Conclusion:

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.

Source: The Hindu BL

Mains Question:

Q. Discuss why there is surge in imports of commodities when we have strong domestic presence and resources? Examine with Example.