India’s external sector

Udayan Hazarika

(udayanhazarika@hotmail.com)

India’s performance in its external sector is repeatedly under the scanner for deficit trading and gradually falling foreign exchange reserves. Recently, India is showing a “not worried” mode in the foreign trade arena despite Mr. Trump’s election to the US presidential post and knowing well that within a very short span he is taking over the charge. Those who can recall Mr. Trump’s remark during his last term (2017–21) that India is not importing more from the US will definitely feel uneasy about the fact that India is getting a positive trade balance against the US in their trading last year. Indo-US trade flourished, with a total volume of trade being $120 billion, and India’s trade surplus was to the tune of $34 billion. Looking at this, Mr. Trump might get provoked to comment that India still maintains the policy of extracting the best benefits from bargaining in their trading with the US. The US is India’s largest trade partner in terms of exports, and India cannot afford to lose this status at this stage. The new US regime has yet to finalize their trade policy, and experts believe that President Trump might impose some type of restriction to make a break to the benefits accrued to the two Asian giants, India and China, from trading with the US. Two factors are accountable in this context: 1) India’s growing oil imports from Russia and 2) the sharp rise in the merchandise imports from China. This should be analysed under the backdrop of Mr. Trump’s vow that he will end the Ukraine-Russia war.

India’s merchandise exports have declined significantly from USD 451.07 billion in 2022–23 to USD 437.06 billion during 2023–24. The decline was to the tune of 3.11 percent. While this is so with exports, the merchandise import position has improved with a decline in imports of about 5.4 percent for the same period. In absolute terms, the volume of imports fell from USD 715.97 billion in 2022–23 to $677.24 billion in 2023–24. The position in the services also showed a similar trend, with a marginal increase in the volume of exports from USD 325.33 billion to USD 339.62 billion, giving an increment of 4.39%, while imports fell from 182.05 billion USD in 2022–23 to 177.56 billion USD (2.47%) in 2023–24. This resulted in a fall in the overall trade balance from USD 121.62 billion in 2022–23 to $78.12 billion in 2023–24. Thus, the volume of deficit trading substantially fell by about 35.76 percent. This was mainly due to the fall in the volume of imports from $898.01 billion in 2022–23 to $854.80 billion from $898.01 billion a year ago. Exports remained stagnant at $776.68 billion USD in 2023-24 from USD 776.68 billion a year ago. One of the significant aspects of India’s external trade during the fiscal year 2023-24 was the substantial improvement in the trading with China, resulting in the replacement of China as India’s top trading partner in place of the US. In that year, China’s trade with India was to the tune of $118.4 billion, as against the US’ trade volume of $118.3 billion. India’s exports to China comprise mainly items of raw materials such as iron ore, cotton yarn, fabrics, handloom specs, fruits, vegetables, plastics, linoleum, etc. Of these, iron ore and ash occupy the top position. Out of the total strength of exports to China, i.e., $16.67 billion, iron ore occupies the top position with $3.42 billion in 2023-24. On the other hand, India’s imports from China mainly comprise items of finished products such as electrical and electronic equipment, machinery, nuclear reactors, boilers, organic chemicals, etc. As all these are valuable items, India’s imports from China have increased from USD 98.51 billion in 2022–23 to $101.7 billion in the next year. India needs to improve her position in the imports sector to reduce her dependence on China for finished products like electrical and electronic items. The cost of raw materials is always less than the cost of finished products, and as a result, India’s trade deficits with China have been gradually rising compared to other countries. India’s trade deficit with China was to the tune of USD 83.2 billion in 2022–23, which increased to USD 85 billion in 2023–24, registering a rise of 2.16 percent on a year-on-year basis. On the other hand, India’s trade deficits with other trade partners like Russia have increased from $43 billion to $57.2 billion, Korea from $14.57 billion to $14.71 billion, and Hong Kong from $8.37 billion to $12.2 billion in 2023-24 for the same period. While this is the story of trade deficits, India has also achieved trade surpluses against many of its western partners, namely the US, European Union, France, Italy, the Netherlands, etc.

The performance of this external sector has slightly improved in the first half of the current fiscal year (2024-25). Total merchandise exports worked out at $178.68 billion during April-August, which has marginally increased (0.13%) from $176.67 billion last year. The benefits accrued through this marginal increment in the export sector, however, are neutralized by the rising merchandise imports from S275.83 billion in April-August 2023-24 to 295.32 billion during the same period of the current fiscal year, giving a rise of more than 7 percent. Similarly, the services sector, both exports and imports, registered a rising trend, leading to a rise in the overall trade deficits from 37.94 billion in April-August 2023 to 46.46 billion of the same periods of the current year—a rise of about 22.45 percent.

In the meantime, the Ministry of Commerce and Industries has released data regarding the external sector until October 2024. The ministry highlighted the growth in the export sector during this period. The growth in merchandise exports during April-October 2024 was to the tune of 3.18 percent year on year, while growth in imports was 5.77 percent year on year during the same period. The overall export growth during this period has been estimated at USD 468.27 billion as against USD 436.48 billion on year-on-year growth. The increment was to the tune of 7.28 percent. However, the data pertaining to overall imports reveal that the increment in imports is also almost equivalent, i.e., 7.05 percent, leading to an increment in the trade deficits from USD 60.02 billion in April–October 2023 to USD 63.24 billion in the current year of the same period. Thus, the increase in the trade deficit was to the tune of USD 03.22 billion, or 5.36 percent.

India needs to concentrate on the items of import from China and seek global markets elsewhere than the traditional markets for exporting items. Emphasis should be given to the MSMEs producing consumer electrical and electronic items, which have tremendous domestic demands and also have wide markets in third-world countries.