Don’t celebrate India’s surprise trade surplus

The downward revision of 8.2 percentage points from its January 2020 projection is a major revision over a short period by any standards

The Covid-19 pandemic is set to leave around 170 countries with lower GDP per capita by the end of the year. The IMF forecasts a sharp contraction of almost five percent in global economy during the year, as compared to a growth of 2.9 percent in 2019.

The downward revision of 8.2 percentage points from its January 2020 projection (of a growth of 3.3 percent) is a major revision over a very short period by any standards.

This only goes to show the enormity of the threat that the world is facing today from coronavirus, which could significantly alter the way business is conducted, trade across borders takes place and people engage with each other.

In line with global trends, the IMF has slashed India’s growth projection to -4.5 per cent for 2020 which is a substantial 10.3 percentage points lower than the January 2020 outlook of 5.8 per cent.

Subdued growth prospects, as a result of the global pandemic, have had adverse effects on demand, both global and domestic, thereby also leading to a slump in trade.

UNCTAD, in its recent report, estimated that India’s trade impact due to the Covid-19 outbreak could be around US $348 million. India is among the top 15 most affected countries on account of manufacturing slowdown in China that is disrupting world trade.

As per the estimates, exports across global value chains could decrease by around US $50 billion during the year in case there is a two per cent reduction in China’s exports of intermediate inputs.

India’s exports and imports saw a positive growth in February 2020, but plummeted in the last four months, recording steep contraction.

With the average rate of contraction in imports of 53.5 per cent in the first quarter of 2020-21 being much larger than the average rate of contraction in exports, which was 36.3 per cent, India incidentally recorded a surprise trade surplus in June 2020.

The trade surplus of US $800 million witnessed in June 2020, based on the provisional estimates of the ministry of commerce and industry, though subject to revision, is important on several counts.
It represents a trade surplus for India after a gap of 18 long years, with the last surplus recorded in January 2002, with a modest surplus of US $10 million. A year prior to that, in February 2001, India had accounted for its largest trade surplus, of US $238 million, in the last 30-year period prior to May 2020.

For a country that has been traditionally dependent on imports to meet its domestic demand, and has not witnessed an annual trade surplus for the last several decades, to have recorded a trade surplus of value close to a billion US dollars, is a matter to cheer though not an occasion to celebrate, given the circumstances under which it was achieved.

One must also recognise the fact that the country has witnessed its largest trade deficit to the tune of US $190 billion in 2012-13, and more recently in 2018-19 recorded a deficit of US $184 billion.

The surplus in trade witnessed last month, could be attributed to several factors.
While major commodity groups such as gems and jewellery, readymade garments of all textiles, petroleum products, electronic goods, engineering goods, and plastic, among others, recorded negative growth during June 2020 vis-à-vis June 2019, major commodity groups including iron ore, rice, organic and inorganic chemicals, drugs and pharmaceuticals, have in fact recorded positive growth during the same period, with partial resumption of domestic industrial activity and opening up and relaxations in many countries.

Major import commodities including gold, coal, coke and briquettes, petroleum crude and products; electrical and non-electrical machinery, and electronic goods, have shown negative growth in June 2020 over the corresponding month of last year. The global Brent price for crude ($/bbl) has decreased by almost 37 per cent in June 2020 vis-à-vis June 2019.

Partially reflecting a slump in domestic demand, while non-oil imports witnessed a contraction of 45 per cent, non-oil and non-gold imports recorded a negative growth of 41 per cent in June 2020 as compared to June 2019, contributing to the trade surplus.

Gold imports during the first quarter of FY 21, witnessed an astonishing contraction of almost 94 per cent.
The circumstances under which India recorded its trade surplus last month leave no room for complacency. To be able to continue to witness surplus in external trade, along with a pickup in domestic demand and industrial activity, several concerted efforts and reforms would be needed.

Addressing supply and demand disruptions would necessitate ensuring an enabling environment and kick-starting domestic manufacturing activity, especially through MSMEs on a large scale. The clarion call by the Prime Minister to reduce import dependency and to strive towards an Atma Nirbhar Bharat is an effort in this direction.

A change in mindset possibly leading to large scale local production, sourcing and acceptance of non-essential discretionary items, which are otherwise imported, only due to their intrinsic brand value, could also perhaps be a game changer in the medium to long run, with countless spill-over benefits for the domestic economy.

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