Hindustan Times ST (Mumbai) - Live
Why India’s trade surplus may not be good news
NEWDELHI: India’s trade balance went into positive territory in June. In normal circumstances, a trade surplus generates tail winds for economic growth.
However, under the current circumstances, a trade surplus might actually be bad rather than good news.
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 for the final product, a fall in production of mobile phones will lead to a fall in import of batteries. 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.
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 are 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.
A comparison of June 2020 and June 2019 trade statistics also shows that both exports and imports have fallen in comparison to last year.
The biggest fall in absolute terms is in the non-petroleum and non-gold and silver import category. This is most likely a result of a fall in derived demand for intermediate and capital goods arising from a fall in domestic production.