Calcutta Notebook

Trade Surplus


Good news is that Indian exports were more than imports in the April-June of the current year 2020-21. The combined trade is known as "Trade Balance." Excess of exports over imports is known as "Trade Surplus." India has made such a trade surplus after 13 years. In other words India is getting more dollars from exports and requiring less dollars for imports.

The Trade Balance is part of the "Current Account Balance." On the other hand, India sends dollars to pay for the imports and from the outward investments made in other countries by Indian investors. The combined receipts from exports and inward foreign investments are called current account receipts. The combined remittances made for imports and outward foreign investments are called current account remittances. The net difference between current account receipts and remittances is known as "Current Account Balance."

As said above, India's current account balance has turned positive in tandem with the trade surplus. The country had incurred a Current Account Deficit of USD 15 billion in April-June 2019. "USD" stands of United States Dollars. This has now become a Current Account Surplus of USD 20 billion in 2020. This is good news because India is holding its fort in the global economy.

And second good news is that exports of services have grown through marginally during the Covid -19 pandemic. The future lies in services and it is heartening to note that India has secured an increase in the exports of chemicals and drugs in this period. The third good news is that there has been a steep reduction in imports of fuel oil. This is partly due to the slowdown of the economy and reduced demand. But it is also due to the growth of solar power which has provided the required energy to keep the economy going.

The challenge is to make this Current Account Surplus sustainable. Number of indicators suggest that the present Current Account Surplus may hide major weaknesses in the economy. The first weakness is that the price of the rupee is declining against the dollar. A Current Account Surplus means that the country can manufacture goods at a cheap price and sell them to the world. It can earn dollars. This leads to greater availability of dollars in foreign exchange market. This leads to a reduction in the price of the dollar just as the price of potatoes in the market decreases with increased supply of that vegetable. The reduction in the price of dollars means that the value of rupee increases. One dollar available in Rs 60 is "cheap" while one dollar available in Rs 70 is "expensive." Thus, the present Current Account Surplus means that India is getting more dollars than it needs. This should have led to a reduction in the price of dollar. The simple formula is that the currency of a country rises with a Current Account Surplus. However, the opposite is taking place in India today. The price of dollar was Rs 72 in September 2019, it has increased to Rs 75 at present. The Current Account Surplus has increased at the same time. The two movements are contradictory. Perhaps, this is happening because the sentiment is negative. Although India is exporting more at present, the pundits reckon that Indian economy is going downhill, and the future is bleak. Thus, speculators may be hoarding dollars to make a quick profit from the impending change of Current Account Surplus into a Current Account Deficit.

The second weakness is that India's exports of raw materials have been buoyant while those of manufactured goods have declined. According to a Press Information Bureau report, exports of iron ore have increased by 63 per cent, those of oilseeds have increased by 50 percent and those of rice by 33 percent between June 2019 and June 2020. On the other hand, the exports of jewelry have declined by 50 percent, leather products have declined by 40 percent and textiles have declined by 35 percent in the same period. Instead of moving towards becoming a global manufacturing hub, India is losing ground in exports with the exception being that of chemicals and drugs. The third weakness is that a survey done by Reserve Bank of India indicates that the Consumer Confidence Index declined from 100 in March 2019 to 64 in March 2020 and further to 54 in July 2020. This means that consumer confidence was going downhill even before the Corona virus Pandemic and has continued to slide.

These three weaknesses indicate that the underlying economy of the country is in a bad shape despite a Current Account Surplus at present. It is like a person is suffering from TB. He is not able to eat. He can not buy much food leaving a "surplus" in his home budget even though his economy is in a shambles. Therefore, the present Current Account Surplus should not be taken as an indicator of strength of the economy. Rather it is a short reprieve from the secular decline in fortunes. This prognosis is supported by the decline in Consumer Confidence Index mentioned above and the decline in total exports by 5 percent between 2018-19 and 2019-20-before the Covid -19 pandemic. In truth present weaknesses are not due to Corona. They are structural.

The Government must get out of the business-as-usual mode and take three steps. One, the education system should be turned towards English, which is the base of computer and internet-based services, and foreign languages, which are the base of global export of services. But India instead moving in the opposite direction of promoting local languages at the cost of English. The two should go together-local languages for cultural empowerment and English for economic empowerment. Two, the Government must come up with a huge scheme to upgrade manufacturing and agriculture to the technological frontiers. A scheme to subsidise import of frontier technologies must be launched. That will reduce cost of production and retrieve global loss in competitiveness. Three, the Government must reform the administrative machinery at the ground level so that the entrepreneur can focus on his core job of producing goods and services instead of worrying about managing the government officials. The reduction of exports and the fall in Consumer Confidence even before the Corona Pandemic indicates that Indian economy is on a long-term decline. 

Vol. 53, No. 18, Nov 1 - 7, 2020