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Indian Economy

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Exports grow, Imports shoot up: All well with India’s external trade

Article

Amir Ullah Khan

India's export target of $125 billion for 2006-07 has been met and the government hopes to achieve $160 billion in the current financial year. In addition to goods, services worth $76 billion have been exported. This growth in exports is remarkable but not surprising given the fact that India holds clear comparative advantages in a large number of goods and in the new area of services trade. Exports bring in valuable foreign exchange, create employment and foster competitiveness.

But what is interesting is the growth in India's imports. The growth in February 2007 was higher than the 5.55 per cent recorded in January 2007. According to the Director General of Commercial Intelligence and Statistics, imports grew 25.11 per cent to $14.36 billion in February, 2007, compared with the revised figure of $12.63 billion in February 2006. With imports growing faster than exports, the trade deficit in February this year stood at $4.66 billion. Trade deficit for the April 2006 to February 2007 period stood at $55.85 billion, 48 per cent more than the trade deficit of $37.61 billion in the same period for last year. What does this mean for a country like India?

Rising imports in today's economy is not the kind of bad news it used to be years ago. Today, a country that is capable of importing large quantities of goods and services can use these imports to produce more goods. Also, it has enough resources to pay for this level of rising imports. With a strong foreign exchange reserve that now stands at 180 billion dollars, and a rich NRI population that remits more than 23 billion dollars a year, the foreign exchange regime in India is on a strong wicket. The hallmark of India's economic reforms have been an outward looking and liberal trade policy characterised by removal of quantitative restrictions, rationalisation of tariff levels to match the tariffs in other developing countries, especially ASEAN, removal of licenses for setting up industrial units and removal of licenses and quotas for exports and imports. This has led to a spectacular rise in both export and import levels over the last decade. India's share in world trade which was 2.4 per cent in 1941 had reduced to 0.4 per cent in 1990 and has again inched back to the 1 per cent level.

Trade policy reforms have marked a shift from India's policy of import substitution and export pessimism. The mean tariffs on Indian borders for foreign goods have been consistently brought down to meet the country's WTO obligations and also to bring parity between tariffs in India and elsewhere in the world. From a mean tariff level of around 110 per cent in 1991, the mean tariffs have been brought down to less than 22 per cent on most products, and it should further reduce in the years to come. FDI inflows in 2006-07 were $16 billion and this is a big jump over the $5.5 billion in 2005-06. A small number of goods fall in the 'restrictive list' of imports, the restrictions being principally on account of security, health and environment protection issues. Most goods are freely importable on payment of the specified customs duty without licensing requirements. There are some import restrictions on goods reserved for production by the small-scale sector units in the country, or are home or village-based requiring low skills and employing a large number of people.

What is also interesting is the diversity of India's exports. Unlike most countries that depend on trade with the US alone, India's exports go to a large number of countries. In fact, in the export basket, India's most important trading partner is the European Union. UAE stands third with nearly a tenth of India's exports headed there. In Imports too, India buys from a large number of countries and here too, Saudi Arabia, UAE and Australia are important partners. The graphs below show the share of exports and imports from India with its more important trading partners. A diversification in the export import basket is important for countries that must reduce their dependence only on one or two markets. And the Indian trade sector is clearly diversified, both in terms of the large number of products it exports and imports and in the number of countries it trades with.

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India's exports are now reaching a larger number of countries and more and more items of export are being traded. The same story repeats in terms of imports. Trade with European Union and the Gulf has been increasing rapidly. India's look east policy has reaped benefits and trade with eastern countries especially in the ASEAN region has grown. Given this strong growth in trade and its diversity, it is important to look at what needs to be done further. In terms of policy the only thing that needs to be looked at is the pace at which tariffs could be brought down further. There is little or no role that the Commerce ministry has to play in trade beyond setting export targets-$200 billion in 2008-09. It can do little on account of higher oil prices or poor labour law. The Commerce ministry can only urge for reforms in infrastructure, simpler industrial procedure, lower interest rates and a unified goods & services tax. The SEZ policy is a classic case of how the Commerce ministry can do little amidst the confusion that exists in the domestic economy. The deadlock at Doha shows how little the Commerce ministry can do given the confusion that exists at the international level. At the regional level, the low levels of trade within SAARC show how little the Commerce ministry can do at the regional level. However, what is indeed a welcome sign is that increasingly trade policies are guided not by political interests and mindsets but by the principles of international trade and inter dependence.

(The writer is an economist working with the India Development Foundation and can be contacted at: akhan@idfresearch.org)

Other article by Mr.Amir Ullah Khan

Indian Economy : On The Fast Track


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