The trade balance | Business Standard Editorials

Clipped from: https://www.business-standard.com/article/opinion/the-trade-balance-122121901239_1.html

Containing imports will not help

One of the big economic policy challenges this year has been the management of the external sector. Higher than expected monetary tightening by the US Federal Reserve led to a sharp appreciation in the US dollar, and, as a result, most currencies, including the rupee, came under pressure. Besides, the slowdown in the global economy affected exports. Although imports have also softened, they are likely to remain elevated because of both relatively high commodity prices and India’s growth prospects. Consequently, the current account deficit is expected to increase, which could lead to financing pressures and affect the value of the rupee. The September edition of the Reserve Bank of India’s Monetary Policy Report showed that professional forecasters expected the current account deficit to be at 3.4 per cent of gross domestic product this fiscal year. As things stand today, the management of the external sector would continue to pose challenges even next year.

In order to reduce pressure on the current account, the government is reportedly contemplating curbing imports of “non-essential items” by increasing tariffs in the upcoming Budget. The government is said to be preparing to contain imports of goods that have enough production capacity in the country. This certainly is not the right approach to address the external account because of a variety of reasons. It would be extremely difficult for officials to determine what is essential and what is not. The exercise will only increase overall tariffs in the economy and make it less productive. India tried and tested such measures in the pre-liberalisation era and regularly ended up facing external-sector problems. Further, such selective interventions open up the possibility of lobbying and affect the overall business environment.

Additionally, such a measure would be contrary to the government’s recent position on negotiating and signing trade agreements.

In fact, it appears that there are different views in the government on trade. At a recent event, for instance, one of the top policymakers noted the government could reduce Customs duty in the upcoming Budget. According to the World Trade Organization, India’s most-favoured-nation import tariffs are the highest among major economies. This has clearly not helped. If the government intends to reduce the pressure on the current account in a sustainable way, it should focus on pushing exports rather than containing imports. The government must accept the nature of global trade and adapt accordingly. To push exports, Indian firms will need to get into global value chains, which is not possible at the scale required in a high-tariff economy.

Increasing trade barriers at this juncture could be particularly damaging for India as global firms are looking to diversify out of China. Multinational corporations would always prefer jurisdictions where goods can move in and out seamlessly, which is not possible in a high-tariff economy. Further, to improve the position on trade, Indian policymakers need to review how the currency is managed. A strong currency in real terms will not help the tradable sector. Despite all the volatility in the currency market, the rupee has appreciated in real terms this fiscal year. It should be allowed to adjust to avoid imbalances on the external front. Since currency adjustment is non-discriminatory, it is a far better tool for managing the external account than selective import controls.

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