Falling off balance?

Trade data released by the Ministry of Commerce and Industry revealed that India's exports in November 2022, in terms of merchandise trade, grew by 0.6 per cent on a year-on-year basis to USD 32 billion, and imports grew by 5.4 per cent to USD 56 billion. At the same time, India's merchandise trade deficit shrank to a six-month low of USD 23.81 billion. In terms of overall trade (merchandise plus services), exports grew by 10.97 per cent to USD 58.22 billion in November 2022, and imports grew by 5.60 per cent to USD 69.33 billion. For an import-dependent country like India which aims to expand its export footprints in the global trade scenario, the narrowing of the trade deficit, in general, could be seen as a positive sign. However, apart from the outcome figures, the path through which the narrowing of the deficit is achieved also holds importance. The trade deficit of a particular country may come down primarily because of two reasons — the country has ramped up its export potential significantly, or the country has started to import lesser items on account of shrinking domestic demand. Additionally, certain directional fluctuations in the prices of items the country imports or exports also impact the trade deficit. Now, one may observe that India's export prospects are not very promising at present. Firstly, the year-on-year growth in merchandise exports has been a mere 0.6 per cent in November. Though an improvement over the contraction experienced in the preceding month from USD 35.73 billion to USD 29.78 billion, the November figures are starkly lower than the September year-on-year growth of 4.82 per cent from USD 33.81 billion to USD 35.45 billion. Seemingly, it can be said that there is hardly any let-up in the prevailing crunch in India's export sector. The marginal growth of 0.6 per cent is also diluted by the fact that it is an improvement over a festive month in 2021 which had fewer working days. The critical question is why India's export sector is on a decline. A common argument is that most of the nations to which India exports, including advanced nations, are witnessing a record slow growth — reducing the demand for Indian products. However, contrary to India, other competitive nations like Vietnam and the Philippines are witnessing growth in their exports. It may be a matter of contemplation as to how these countries have managed to keep their export growth intact. To sum up, it can be said that the constraint in India's export sector is also driven by its policy failures, apart from the global economic slowdown. It appears that India has consistently failed to tap the global markets, and in diversifying its export basket. The next question is if India's export sector is not performing well, what has led to the narrowing of the trade deficit? Apparently, it has come on account of a slump in demand, leading to lower imports. It appears to be a case that the narrowing of India's trade deficit has resulted from a below-par improvement in the import of goods. This is a tricky part as the import of certain items may be unnecessary but others, including capital goods, can be very necessary. In order to put a tab on the widening trade deficit, India should strive to boost its exports. It may be noted that the fall in imports might be a result of the deliberate strategy to cool down demand in order to contain inflation. Falling in line with the global trend of monetary policy tightening, the Reserve Bank of India has increased its repo rate under the Liquidity Adjustment Ratio (LAF) by 225 basis points this fiscal. The present state of the trade balance also doesn't augur well for foreign reserves and the exchange rate of the Indian rupee. As global trade will reshape itself after the Russia-Ukraine war ends, India stands a chance to claim its share in the revamped global market.