New Delhi -°C
Today in New Delhi, India

Aug 11, 2020-Tuesday
-°C

Humidity
-

Wind
-

Select Country
Select city
ADVERTISEMENT
Home / India News / June saw India make its first trade surplus in 18 years. But this isn’t good news

June saw India make its first trade surplus in 18 years. But this isn’t good news

Exports are demand for domestic goods by foreign buyers, whereas imports constitute a leakage of domestic incomes on foreign goods, and the surplus -- the difference between the two -- turning positive is usually good news.

india Updated: Jul 17, 2020 13:34 IST
Roshan Kishore
Roshan Kishore
Hindustan Times
Many people including Piyush Goyal, the union minister of commerce and industry have celebrated the trade account turning positive.
Many people including Piyush Goyal, the union minister of commerce and industry have celebrated the trade account turning positive.(Bloomberg file photo)

India’s trade balance went into positive territory in June . The last time this happened was in January 2002. In normal circumstances, a trade surplus generates tail winds for economic growth.

Exports are demand for domestic goods by foreign buyers, whereas imports constitute a leakage of domestic incomes on foreign goods, and the surplus -- the difference between the two -- turning positive is usually good news.

Many people including Piyush Goyal, the union minister of commerce and industry have celebrated the trade account turning positive.

“Rapid Turnaround of Exports: Realising PM @NarendraModi ji’s vision of Atmanirbhar Bharat, for the first time in 18 years, India records a monthly goods trade surplus in June!”, Goyal tweeted on 15 July.

However, under the current circumstances, a trade surplus might actually be bad rather than good news. Here’s why.

The world economy today is characterised by global value chains. A large part of trade flows are driven by derived demand. For example, if mobile phone factories were importing batteries and motherboards for the final product, a fall in production of mobile phones will lead to a fall in import of batteries and motherboard. In this case, a sudden fall in imports might be symptomatic of fall in domestic economic activity rather than gains on the import substitution front, which is what the Atmanirbhar Bharat campaign seeks to achieve..

A large part of India’s import requirements fall squarely in the derived demand nature. According to the World Bank’s WITS database, almost 90% of India’s imports is made up of raw materials, intermediate goods or capital goods i.e. means to undertake domestic production activity. The share of consumer goods in Indian exports is much higher. India had the highest import to export ratio in the raw material category, a proportion that is skewed by crude oil imports. Unfortunately, the WITS analysis is only available up to 2018. However, it is unlikely that India’s domestic production and import structure have changed radically after this period.

 

It is useful to analyse the June 2020 trade surplus in this background.

A comparison of June 2020 and June 2019 trade statistics shows that both exports and imports have fallen in comparison to last year.

This analysis uses information from the Centre for Monitoring Indian Economy (CMIE) database to classify imports and exports into useful categories. Exports are divided into petroleum and non-petroleum exports while imports are classified into petroleum, gold and silver and other imports. The biggest fall in absolute terms is in the non-petroleum and non-gold and silver import category. This, as has been pointed above is most likely a result of a fall in derived demand for intermediate and capital goods arising from a fall in domestic production. This is not good news for the economy. In proportional terms, petroleum imports have more than halved thanks to a reduced demand and low crude prices.

Experts agree. The “surprise trade surplus...could be reflective of weak domestic demand, relative to global demand; the weakness in imports was spread across investment and consumption goods”, said a note by Pranjul Bhandari, Chief India Economist at HSBC Securities and Capital Markets Ltd.

Sign In to continue reading