Recently, India released its trade statistics for the month of February. We have data for the first 11 months of the financial year 2022-23 (FY23). The combined value of our exports of goods and services is a little over $700 billion. Based on current trends, the number will cross $750 billion or three-quarters of a trillion for the entire financial year. The value of goods and service imports was $817.5 billion for the same period. The combined value of exports and imports of goods and services for FY23 will likely exceed $1.6 trillion. With the likely size of India’s nominal GDP at the end of FY23 around $3.4 trillion, India’s overall trade-to-GDP Ratio (TGR) is likely to be around 47%. Does this suggest that India has become more open in FY23 than in the recent past? The answer is ‘no’ because India did 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 in a period from 2011 to 2014 at around 54-56%. Some look at a decline in this ratio in the following years as an indication of India turning inwards and becoming protectionist. We would like to argue that this is a misplaced proposition because of the following data points.
Firstly, a particular point of interest is to examine TGR changes vis-à-vis the price of crude oil, which has always been a large part of our imports. The years when the TGR was at its highest levels were also when crude oil prices were at all-time highs of about $100 per barrel (yearly average of the freight-on-board price of our crude oil basket). With prices cooling down to $84 per barrel in 2014-15 and a low of about $45 in FY21, India’s TGR declined to a low of 33%, recovering to 51% again in the first half of FY23, with crude prices ruling at $96 per barrel. Thus, to say that our trade is losing sheen would not be correct. It is just 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 was 21.3%, and that of services was 23.2% in this period. Since then and up to FY21, our growth rates slowed, with that of goods slowing significantly. During this period, India’s imports in value terms also came down because the price of crude oil declined sharply. As a result, the TGR came down as well.
The reasons for India’s export slowdown are not far to seek. One, despite the best efforts of central banks, the economic recovery in advanced economies was sluggish, and hence their aggregate demand was weak. That affected India’s exports. Second and perhaps more importantly, India’s balance-sheet stress played a bigger part. Non-financial balance sheets had to be deleveraged, and financial (banking and non-banking) balance sheets had to be strengthened with capital infusion, loan-loss recognition, etc. That is reflected in the data on India’s capital goods imports.
Since FY14, the country’s import of capital goods has witnessed a fall, with its share in total merchandise imports falling to a low of 13% and remaining in a range of 11-14% after that. This slowdown in the import of capital goods can be attributed to the industry’s low credit growth and capital formation in general because of the financial cycle downturn. There was a slowdown in gross capital formation to 34% in FY14 and further to 31% in FY22.
Thus, India’s declining TGR during the 2012-2021 period is not a sign of any increased insularity or withdrawal from the global trading system, but due to disappointing global growth and India’s balance sheet woes.
In this regard, the recovery in India’s exports of goods and services in the last 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 enhance the competitiveness of India’s merchandise exports. Third, India’s service exports go well beyond software services, and, as Pranjul Bhandari and Ayushi Chaudhary argued recently in Business Standard (‘India’s export cushion’, 15 March 2023), it is not down to inflation.
What does the near future on the external front hold? India continues to pursue an open-minded and pragmatic approach to international trade that is not hostage to an ideology-driven slant in one direction or the other.
In October 2022, US Trade Representative Katherine Tai said that the traditional approach to trade, marked by tariff elimination and market liberalization, had imposed significant costs on America’s economy and society. Although contexts differ, all countries bear the consequences of ill-thought-through trade liberalization.
A country has to remain open to competition and hiding behind protectionist walls interminably will cause more harm than good. However, trade policy cannot be about showing the other cheek either. India is travelling down the middle of the road. The recent recovery in India’s exports of goods and services looks likely to be sustained amid a difficult global environment, which is testimony to the fact that India’s industrial policy is not undermining our export competitiveness nor its openness to the world.
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