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Sustaining export performance and curbing imports, imperative
View(s):Given a bleak trade performance in the first half of this year, even a modest improvement in the trade deficit is a hopeful sign. While one swallow does not make a summer, the better trade performance brought about by an increase in export earnings in July gives rise to expectations of a reduction in the trade deficit.
Although there are reasons to expect export growth in June and July to continue, it is difficult to foresee a curtailment of imports. The gains from an improved export performance may well be negated by an influx of imports. The challenge is to maintain the improvement in exports while curtailing import expenditure that continues to rise.
Trade performance
The massive trade deficit of US$ 4.6 billion in the first half of the year was mitigated somewhat in July due to an increase in export earnings by 8 per cent. Export earnings grew mainly due to an increase in agricultural exports by 21.6 per cent with tea export earnings increasing by 20 per cent. Consequently the trade deficit was contained somewhat, despite import expenditure increasing by 20.8 per cent.
If the trade deficit of US$ 4.6 billion in the first half of the year continued at the same rate, the trade deficit for the year would have been US$ 9.2 billion. The improvement in exports in July evokes an expectation of the trade deficit declining. The projection of the trade deficit of US$ 5.3 billion in the first seven months for the rest of the year would result in the deficit declining to about US$ 9 billion. On the basis of the trade performance of July for the remaining five months the deficit would be slightly less.
Although this is an improvement from the trade deficits of US$ 9.7 billion in 2011 and US$ 9.3 billion last year, it is still a large trade deficit. If export earnings in the rest of the year flop or import demand increase, then the trade deficit could swell to as much as that of last year.
The significance of the improvement in the trade balance lies in the underlying reasons for it. As pointed out in previous columns, the trend of declining exports was ominous, not only from a balance of payments perspective, but owing to its implications for the country’s industrial development and sustained economic growth. This trend was reversed in June and July. Exports that had declined by 5.8 per cent in the first six months of the year increased by 2.5 per cent in July owing to an increase in both agricultural and industrial exports.
Agricultural exports
Agricultural exports increased mainly due to an increase in the volume and prices of tea exports and spice exports. Production increases enabled larger tea exports while more favourable international prices supported the increase in earnings. Tea production increases in August and September may increase export earnings.
Industrial exports
The growth of industrial exports by 7 per cent in July compared to a year ago was mainly due to the country’s main manufactured export increasing by 7 per cent over that of July 2012. This improvement perhaps reflects the slight resurgence in western economies and the impact of the currency depreciation. If this revival in industrial exports continues, it could be important for future export earnings and sustained economic growth.
Import expenditure
The import side is unsatisfactory as all three categories of consumer, intermediate and investment goods imports increased in July. Consumer goods imports increased owing to both food and non-food items. Food imports increased by as much as 21.5 per cent in July despite tariff increases and depreciation of the rupee.
It is alarming that vehicle imports increased significantly in July. According to the Central Bank, “vehicle imports, which were declining on a year-on-year since April 2012 began to increase from June 2013 with growth accelerating further in July 2013, becoming the main contributor to the increase in consumer goods imports.”
These imports must be contained. There are already a large number of vehicles on the roads and in unsold stocks. Is it not time to curtail imports of vehicles that consume fuel that accounts for over 25 per cent of import expenditure? Fuel imports in July were 110 per cent higher than in July last year, partly owing to the costs of processed oil being higher and partly due to increases in consumption.
Improvements in public transport, especially train transport, are a means of decreasing oil imports. Strictly enforced petrol and diesel use among public sector users are also crucial to the containment of the petrol import bill. A reduction in oil consumption is essential to achieve an improvement in the trade balance.
Although investment goods imports declined by 12.8 per cent they were still high accounting for over 13 per cent of import expenditure. Machinery imports increased by nearly 30 per cent in July compared to a year ago. The high expenditure on investment goods imports is due to high infrastructure expenditure.
Challenges
Containing the trade deficit by increasing exports is vital for the resilience and sustainability of the economy. It is also important to contain import expenditure that is about twice export earnings. To contain the trade deficit, the two rates of increases in exports and imports have to be brought into alignment by slowing down the growth of import expenditures while increasing exports by removing constraints on higher export growth.
The expectation of an improvement in the trade performance could be upset if there is a setback to tea prices and tea production was to lose its momentum. The increase in garments exports too must be accelerated. Thus what is needed is a permanent shift in export growth and import restraint in line with it. Sound macroeconomic policies are vital to bring this about.
The containment of aggregate demand is imperative to achieve a decrease in import expenditure. It is particularly important to reduce government expenditure that has high import content, low return to investment and little impact on either export earnings or import expenditure. It is also important that import expenditures does not rise faster in the last quarter with consumer goods rising during the festive season.
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