India surging to record trade deficit
By Raja Murthy
MUMBAI - India's tearaway economy, with an 8.8% growth rate, may drive the
country's trade deficit to a record US$135 billion this fiscal year. That trade
gap could mean big trouble lies ahead, or it might simply be a measure of the
country's increasing strength.
For the present, the deficit threatens to widen as the global economic recovery
remains sluggish and as some countries, such as the United States, India's
second-largest trading partner, turn towards protectionism. The trade gap in
the year to March 31, 2010 was an estimated $102 billion, down from $118
billion in the previous 12-month period.
Commerce Secretary Rahul Khullar told reporters that the trade
gap - which rose to $56.6 billion in the April to August period - was "very,
very large" but one that can be managed.
A deficit drains India's foreign exchange reserves. That can weaken the
country's currency, at present hovering at around 46 rupees to the US dollar,
which in turn drives up the cost of imported goods, including oil. Foreign
exchange reserves declined by $828 million to $284.5 billion in the week to
Picking up the pace of exports would help to reduce the deficit, but the US
House of Representatives this month passed two bills that would force
government departments to reject some imports. The "Made in America Act"
compels congress to buy only goods and services made in the United States;
introduced by Democrat Marcy Kaptur, the House approved it by an overwhelming
371-36 vote. The Berry Amendment Extension Act requires the Department of
Homeland Security to reject purchase of products not made in the US. (The Berry
Amendment Act was enacted in 1941 mandating the Department of Defense to
procure only home-made items). Both bills requires senate approval before
Other US governmental departments and consumers might join the protectionist
herd. Ohio Governor Ted Strickland has already banned offshore outsourcing of
government information technology projects, attracting condemnation by India's
information technology industry leaders - the Indian IT industry generates
one-third of its $60 billion revenues from exports from the US.
Indian protests against the US clampdown on imports come with some irony -
given New Delhi's protectionist period in the 1970s and 1980s, when the country
was awash with the "Be Indian, Buy Indian" slogan.
Supporters in the US of its anti-import direction appear also to have forgotten
the shrill screams towards the end of the last century against Indian and
Chinese protectionist policies, and American crusades for global free trade.
The "free-ness" quotient in free trade apparently fluctuates with
Som Mittal, president of the New Delhi-based National Association of Software
and Services Companies, India's top information technology industry body,
criticized the US protectionist moves as "a disturbing trend".
Since exports have buoyed India's prosperity in recent years, the emergence of
a large trade deficit is rousing considerable anxiety, even though exports for
April-August period surged 28.6% to $85.27 billion. In August, exports grew a
lower 22.5% compared with a year earlier to $16.64 billion, down from the more
than 30% growth in the three months through June.
In contrast, imports increased 32.3% in August from a year earlier to $29.7
billion and at a 33.1% rate for the April to August period to a record $141.9
Optimists, however, see this import-heavy trade deficit as actually reflecting
a stronger domestic manufacturing sector, with India's 13.8% industrial growth
rate as of July driving up demand for overseas-made machines and other capital
"A significant chunk of the imports are in capital goods, which means the trade
deficit is not such a great concern," said Ajay Sahai, director general and
chief executive of the Federation of Indian Export Organisations (FIEO), an
industry body. "Much of the imports are for the rapidly growing power sector."
Even so, Sahai said exports such as textiles and pharmaceuticals may be hurt by
US protectionism. The Commerce Ministry has also expressed concern that already
struggling export sectors could face setbacks, including carpets, electronics
and agricultural produce.
In response, it is urging exporters to turn more to new markets in Africa,
Latin America, Asia and the Commonwealth of Independent States (CIS), the 12
countries of the former Soviet Union. To help them, the government last month
announced fresh tax sops and incentives worth $227 million to exporters.
Exports have to double to around an annual $400 billion to bridge the deficit
that will otherwise increase with rising imports.
Sakthivel said government incentives did help exporters to penetrate new
markets. This month, an FIEO study of India's export trade with 110 countries
indicated a 20% increase in export volumes in more than 60% of nations surveyed
since the Commerce and Industry Ministry introduced a "Focus Market Scheme" in
2006 to diversify India's export base.
The FIEO report said India's exports to eight out of 15 Latin American
countries surveyed showed growth in excess of India's overall annual export
growth rate of 22.58%. Similar above-average export growth was found in 32 out
of 52 countries in Africa, five out of 10 CIS countries surveyed and two out of
five East European countries.
Exporters could be further inspired to look elsewhere with other new US
protectionist measures, such as the Foreign Manufacturers Legal Accountability
Act of 2010, which makes foreign manufactures liable to be sued for faulty
products whose innards contain imported components.
It means hiring a registered agent to handle any potential liabilities in the
US. Officials of the Confederation of Indian Industries say this costs Indian
exporters between $300 million and $500 million annually.
The Barack Obama government is also increasing the cost of an H-1B visa for
foreign workers by $2,000, adding an estimated $250 million annual bill to the
Indian IT industry.
India - and China - could progressively find the US a harder market to
penetrate, as the anti-import measures of Obama and US legislators, worried
about securing votes amid high unemployment, gather momentum in the hope of
creating more jobs in the US.
One important benchmark, the latest US Consumer Reports Employment Index, in
September continued its downward journey, showing a decline to 49.1 in
September from 50.2 in August. A measure below 50 shows more jobs lost than
gained in the past month. Prospects look bleak for workers in the United States
- and for Indian exporters in the US.