Dogmas and the deficit
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Lower gold imports will help, but any successful attempt at sustained compression of the CAD will involve a compression of the non-gold component of the trade deficit. The trade deficit for 2011-12 was $189 billion, or 10.3 per cent of the GDP. Net of gold, the trade deficit reduces to $140 billion or 7.6 per cent of the GDP. The trade deficit excluding both gold and oil was $42 billion, or 2.3 per cent of the GDP.
Some analysts argue that the onus of correcting the imbalance in trade should come from exports. This is somewhat unfair. Indian exporters find themselves strapped with inferior infrastructure ranging from inadequate power and port facilities, a cumbersome regulatory system and a challenging labour regime. The World Economic Forum compiles a competitiveness index that factors these elements in. Their latest survey ranks India at 59 among 144 countries in terms of overall competitiveness and 84 on the sub-index of infrastructure. The corresponding ranks for China are 29 and 48; for Thailand (a key Asian exporter) the rank is 38 for overall competitiveness and 46 for infrastructure. The implication is that given the handicap that exporters face, the burden of structural correction of the trade deficit in the short to medium term has to come from imports.
The stock argument when it comes to the large oil import bill is that it is contingent on the vagaries of the global market for oil. There is little we can do domestically about it. However, while it is true that we can do precious little about fluctuations in oil prices, we can ensure that oil import volumes remain in check. Crude oil import volumes have increased by 8-9 per cent on average for the past five years despite a slowing economy. This is because we have done very little to encourage conservation. We must remember that fuel subsidies are not just a drag on the fisc; they also encourage domestic consumers to use much more fuel than is optimal. A net fuel importer like India simply cannot afford this. We have taken the first step towards conservation through the partial deregulation of diesel prices and a cap on LPG subsidies. We need to do much more to make sure that domestic prices are at least partly aligned with international prices.