India recently released its trade statistics for the month of February. We have data for the first 11 months of fiscal year 2022-23 (FY23). The combined value of our exports of goods and services is just over US$700 billion. Based on current trends, the number for the full fiscal year will exceed $750 billion, or three-quarters of a trillion. The value of imported goods and services in the same period was $817.5 billion. The combined value of exports and imports of goods and services for FY23 is likely to exceed $1.6 trillion. With India’s nominal GDP expected to be around $3.4 trillion at the end of FY23, India’s total trade-to-GDP ratio (TGR) is expected to be around 47%. Does this suggest that India has become more open in FY23 than in the recent past? The answer is no, as India has not become less open in recent years, as several commentators claim.
India’s TGR, as an indicator of the openness of the economy, has been rising since 1990-91, peaking at around 54-56% in a period from 2011-2014. Some see a decline in this ratio in subsequent years as an indication that India is turning inward and becoming protectionist. We’d like to argue that this is a misplaced one based on the following data points.
First, it is of particular interest to examine TGR changes versus the price of crude oil, which has always been a large part of our imports. During the years that the TGR was at its highest, crude oil prices were also at all-time highs of around $100 per barrel (annual average freight-on-board price of our crude oil basket). After prices cooled to $84 per barrel in 2014-15 and a low of around $45 in FY21, India’s TGR fell to a low of 33% and rebounded to 51% in the first half of FY23, where Crude Oil prices were at $96 a barrel. So it would not be accurate to say that our trading is losing some of its luster. It is only the price of crude oil that is reflected in a lower TGR.
India’s exports grew rapidly in the eight years between FY04 and FY12. The annual growth rate of goods exports during this period was 21.3%, that of services 23.2%. Since then and into FY21, our growth rates have slowed, with commodities slowing significantly. During this period, India’s imports also fell in value due to a sharp drop in the price of crude oil. As a result, the TGR also crashed.
The reasons for India’s export slowdown are not far to seek. First, despite the best efforts of central banks, the economic recovery in the advanced economies has been sluggish and hence their aggregate demand has been weak. This affected India’s exports. Second, and perhaps more importantly, India’s balance sheet stress played a bigger role. Non-financial balance sheets had to be deleveraged and financial balance sheets (banks and non-banks) strengthened through capital injections, credit loss recognition, etc. This is reflected in the data on India’s imports of capital goods.
Since fiscal 2014, the country’s import of capital goods has declined, with its share of total merchandise imports falling to a low of 13% and remaining in a range of 11-14% thereafter. This slowdown in capital goods imports can be attributed to low credit growth and capital accumulation in the industry in general due to the downturn in the financial cycle. There was a slowdown in gross capital formation to 34% in FY14 and further to 31% in FY22.
Therefore, India’s declining TGR in 2012-2021 is not a sign of increasing insularity or a pullback from the global trading system, but reflects disappointing global growth and India’s balance sheet woes.
In this regard, the rebound in Indian goods and services exports over the past two years (FY22 and FY23) amid a challenging global political and economic environment is a likely turning point. It signals the completion of balance sheet repairs in the financial and non-financial sectors. Second, it suggests that improvements in processes and physical infrastructure are beginning to improve the competitiveness of India’s commodity exports. Third, India’s service exports go well beyond software services, and as Pranjul Bhandari and Ayushi Chaudhary recently argued in Business Standard (March 15, 2023), this is not due to inflation.
What does the near future hold on the outside front? India continues to pursue an open-minded and pragmatic approach to international trade that is not subject to any ideological bias one way or the other.
In October 2022, US Trade Representative Katherine Tai said that the traditional approach to trade, characterized by tariff elimination and market liberalization, has imposed significant costs on the American economy and society. Although the contexts differ, all countries bear the consequences of ill-conceived trade liberalization.
A country must remain open to competition, and endless hiding behind protectionist walls does more harm than good. However, trade policy cannot be about showing the other cheek. India drives in the middle of the road. The recent rebound in Indian exports of goods and services is likely to continue in a difficult global environment, proving that India’s industrial policies are not undermining our export competitiveness or its openness to the world. Source: Livemint