Fixing India’s CAD

MINHAZ MERCHANT IS THE BIOGRAPHER OF RAJIV GANDHI AND ADITYA BIRLA AND AUTHOR OF THE NEW CLASH OF CIVILIZATIONS (RUPA, 2014). HE IS FOUNDER OF STERLING NEWSPAPERS, WHICH WAS ACQUIRED BY THE INDIAN EXPRESS GROUP

- Minhaz Merchant

INDIA’S MERCHANDISE TRADE deficit has ballooned following the spike in crude oil prices to over $100 a barrel. Total imports are running at more than $65 billion a month. Exports have averaged $40 billion a month. That leaves an unsustainable trade deficit of $25 billion a month or $300 billion a year.

India imports 83 per cent of its crude oil due to a decades-long failure to find new oil wells to supplement ONGC’s declining output. Gold imports have added to the import burden. Higher commodity prices and a pick-up in India’s manufacturing industry which relies on imported components has exacerbated the trade deficit.

What can be done? First, it’s not all bad news. Services exports are ticking along nicely. The depreciated rupee has helped Indian infotech services companies like TCS, Infosys and Wipro boost exports. The target for services exports in 2022-23 had been set at $300 billion. That is likely to be achieved.

The other two key forex inflows are foreign direct investment (FDI) and remittances from Indians working abroad. Last year, despite Covid-19’s lethal Delta wave, India received $83 billion in FDI. Much of this was due to the slew of FDI deals by Reliance industries but FDI this year promises to be robust as well.

Remittances too are on the rise. In calendar 2021 they totalled $87 billion. The United States recently overtook the United Arab Emirates (UAE) as the largest remitter of foreign exchange from Indians abroad. In 2022-23, estimated services exports ($300 billion), FDI ($80 billion), and remittances ($90 billion) would together result in $470 billion flowing into India. Imports of services (an estimated $150 billion) need to be deducted from this forex inflow. That leaves us with nett inflows of roughly $320 billion from services exports, FDI and remittances.