For most of the struggling global economies, India is like a light at the end of the tunnel; being a fast growing market in a stable democracy that is set to surpass China’s GDP growth rates in a few years; besides, its enormous working population (global Indian working population expected to be 28% of the total by 2020) makes it one of the most happening economies in the coming years.
However, this light may be a speeding train for India unless certain structural weaknesses are addressed, and one of the most serious is the country’s trade balance. India’s overall trade deficit was $117.3 billion in FY 2009-10, which is lower than $118.7 billion for FY 2008-09, as per the Director-General of Foreign Trade (DGFT). But recent government projections anticipate that the deficit is expected to double to $278.5 billion in three years, a 20-fold increase since 2004. Trade deficit is going to be an appalling 12.8% of GDP by 2014 from the current 7.2%. This can be the single largest reason for an unsustainable current account deficit akin to the balance of payment crisis of 1991.
India’s trade with BRIC counterparts exemplifies the anomaly in no uncertain terms. Of the $55 billion in bilateral trade with China in 2010, the trade imbalance is $20 billion in favour of China; up from $16 billion in 2009. Similarly, Russia enjoys a trade surplus of $2.59 billion from a total pie of $4.55 billion in FY 2009-10. With Brazil, India had trade surplus of $1.46 billion, but it turned into a deficit in FY 2009-10 of $1.02 billion. Even South Africa enjoyed a trade surplus of $3.53 billion in FY 2008-09 and $3.62 billion in FY 2009-10.
This can certainly ruin India’s competitive advantage in the long run by increasing unemployment risk & weakening the economy. India should follow a balanced & sustainable trade policy by focussing on merchandise trade and manufacturing and agriculture export. At least some of those minuses should go missing!