August trade gap is an early warning of currency and forex concerns

India’s trade data for August shows an unusual distortion.

While imports grew at a high rate of 37%, there was a negative 1.5% growth in exports, and the trade deficit for August widened to around $28.7 billion from 11 .6 billion in August 2021. The trade deficit widened by more than two and a half times for August is worrying as a growing trade and current account deficit would weaken the currency and dwindling reserves of changes historically accrued by the RBI.

It is structurally inexplicable that exports contract when the economy is in recovery mode, as evidenced by higher imports of capital and intermediate goods. There is always a strong correlation between imports and exports. For example, during the economic boom from 2003-04 to 2008-09, imports increased by an average of 26% per year and exports by 22%. Of course, the global economy was doing better then, and global trade and investment flows were robust.

Then came a period of relative de-globalization of trade and investment, after the financial crises and the global recession. During this long phase ― from 2011 to 2019 ― trade flows slowed considerably. India saw its imports grow by just 4-5% per year from 2013 to 2019. Even exports have stagnated at low single digits throughout this period.

The fact is that imports and exports normally have a positive correlation. But strangely, the August data shows quite a big divergence, with imports up 37% and exports down -1.5%. It is certainly unusual.

This can be due to several reasons. The first, presented by BVR Commerce Secretary Subrahmanyam, is that exports are slow because India has put restrictions on a large number of export products like diesel, gasoline, aviation fuel, wheat, steel and iron pellets. This week, a 20% export tax was imposed on non-basmati, non-parboiled rice, which accounts for more than 80% of India’s total rice exports of 21 million tons.

There may be a political reason for imposing export restrictions on wheat and rice. Prime Minister Narendra Modi is likely worried that unbridled exports will disrupt the domestic accumulation of foodgrain stocks, which will be needed ahead of the 2024 elections if food prices spiral out of control.

Similarly, he may also fear that rising steel prices will increase the cost of flagship welfare programs engaged like Prime Minister Aawas Yojna for low-cost housing. While these concerns may be legitimate, the net effect of restrictions on exports of many products, including energy, is to distort the equation between imports and exports.

Exports also fell because other emerging economies in Africa and Latin America that import from India are themselves facing hard currency constraints due to the relentless rise of the dollar after the conflict in Ukraine. . For example, India is the largest exporter of two-wheelers to Africa, but this year exports from Bajaj Auto, Hero Honda and TVS have declined by 15-20%.

The emerging global recession is also having a serious impact on exports, but our country-led infrastructure growth is keeping imports high. In this scenario, India should closely monitor the growing gap between rising imports and falling exports. It should be noted that from April to August this year, India recorded negative export growth of 35% with its main trading partner, China, even as imports from China continue to grow by 28%. %. Another telling example of the huge divergence between export growth and import growth.

While energy imports are unavoidable, India should closely monitor imports of capital and intermediate goods used for major industrial and infrastructure projects. These untied imports can deplete dollar resources without producing immediate export growth to create the necessary dollar revenues. This mismatch could create monetary instability and excessive pressure on foreign exchange reserves in the short or medium term. The Center and the RBI should be on high alert for the divergence between import growth and export growth. August trade data is a warning signal.

This article first appeared on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been reposted here. To subscribe to The India Cable, click here.

About Ruben V. Albin

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