Susmit Kumar, Ph.D.

Published at South Asia Monitor on May 18, 2016.

Instead of becoming an exporting country like China, India is becoming an importing country like the US. In 2004, India trade deficit was in upper $20s billion whereas in 2015 it was $137 billion. On the other hand, China’s trade surplus was $177.5 billion in 2006, $298.1 billion in 2008, $160.0 billion in 2011, $382.46 billion in 2014 and $602 billion in 2015. Due to $100+ a barrel crude oil price, the current account deficit of India was $78 billion and $88 billion in 2011 and 2012, respectively. The trade deficit for these two years were $162 billion and $200 billion, respectively. Due to drastic reduction in crude oil price in last couple of years, the trade deficit has gone down somewhat.

India’s trade deficit with China has been increasing at an alarming rate - $18.65 (2009), $26.67 (2010), $36.28 (2011) and $52.68 (2015). In 2015, India’s exports to China was $8.86 billion only whereas China’s exports were $61.54 billion. Same year, US had $366 billion trade deficit with China. US exports to China was $116 billion whereas China’s exports to the US were $482 billion. In the first half of 2011, nearly 70% of shipping containers returned empty from the US to China. Significant number of shipping containers, returning from the US to China, had fodder for Chinese cattle. India is facing the same issue with China, i.e. majority of shipping containers returning from India to China are empty.

Due to record trade deficit during 2011-13, exchange rate of India’s rupee (with respect to US dollar) went down from 44.17 in April 2011 to 62.92 in September 2013. In 2015, India was able to overcome $137 billion trade deficit with the help of $72 billion NRI remittance and more than $50 billion Foreign Direct Investment (FDI). Had the crude oil price would have been $100+ a barrel instead of $30+ a barrel, India’s trade deficit in 2015 would have been more than $300 billion and rupee would have collapsed causing significant damage to the Indian economy. In next several years, the middle class population in India would even surpass the entire US population, increasing its trade deficit to the US level which is $400 billion to $600 billion a year. In no way Indian economy can survive this much import. As discussed in my “Chinese yuan replacing US dollar as global currency: A not so distant prospect” (May 1, 2016) article, Yuan is going to replace US dollar as global currency within a decade or so. Hence in next 1991 type FOREX crisis, India would have to go to China to get a loan in Yuan and at that time China might ask for some concession in the territorial dispute which no Indian government would accept because if the governing party would accept the Chinese demand, it would not again come to power for several decades. Hence in such a situation, India would have no option but to default on loan payments, which Argentina did in 2001, causing India to be in dog house of international financial system for decades.

In the current global economy model, China has become world’s production center. It imports minerals from all over the world and using these minerals, it manufactures consumer products to sell all over the world. Even without the 2008 economic crisis, China would have emerged as the dominant economic force by being the largest lender in the world, and almost all major consumer countries would have to declare bankruptcy to China after a couple of decades or so. Therefore, the current global economy model is not sustainable.

That’s why India needs to treat its trade deficit as it treats the defense sector, i.e. it needs to balance its foreign trade without keeping monitory profit in mind.

Let us see how the foreign trade works for India. In India, people use the Indian rupee when they pay storeowners, who in turn purchase imported items in the world market. The importers pay in US dollar when they buy these items in world markets, and these dollars are provided by banks in India that are authorized to do transactions in foreign currencies. Hence, in the end, India has to get these dollars from somewhere, say from the dollars earned by exporters or foreign investors. If India does not have enough dollars to pay for imports, it has to devalue its currency so that exporters can export more. As India imports 70% of its oil and oil is priced in dollars in world market, oil price increases in terms of rupee, after devaluation. Whenever there is a price rise in commodities such as petrol, opposition parties and common people blame the government for the price rise, whereas they should blame their own countrymen, who are purchasing imported items. Indians, who purchase cheap imported items, do not realize that they are in fact paying much more than the sticker price.

Hence India should never import a mass consumption item and it should find a substitute for an imported mass consumption item at the earliest. As crude oil is the biggest import item in India, costing a net $117 billion in 2015, India should find alternative fuels like corn-based alternative fuels include biodiesel, bioalcohol (methanol, ethanol, butanol), chemically stored electricity (batteries and fuel cells), hydrogen, non-fossil methane, non-fossil natural gas, vegetable oil, propane and other biomass sources.

Brazil is the world's second largest producer of ethanol fuels. The Brazilian car manufacturing industry developed flexible-fuel vehicles that can run on any proportion of gasoline (E20-E25 blend) and hydrous ethanol (E100). Introduced in the market in 2003, flex vehicles became a commercial success dominating the passenger vehicle market with a 94% market share of all new cars and light vehicles sold in 2013. By mid-2010 there were 70 flex models available in the market, and as of December 2013, a total of 15 car manufacturers produce flex-fuel engines, dominating all light vehicle segments except sports cars, off-road vehicles and minivans. The cumulative production of flex-fuel cars and light commercial vehicles reached the milestone of 10 million vehicles in March 2010 and the 20 million-unit milestone was reached in June 2013. As of June 2015, flex-fuel light-duty vehicle cumulative sales totaled 25.5 million units and production of flex motorcycles totaled 4 million in March 2015. India needs to do the same even if it costs more than what it pays right now to foreign countries for its oil import, i.e. $177 billion in this endeavor. Despite having 7th largest land mass (nearly 1/6th of Russia and 1/3rd of US as well as China also), India has 2nd largest arable land area in the world, nearly equal to the US, the largest in the world. US agriculture production, employing only 2% of its population, is much more than India. Hence India can easily do what Brazil has done.

India imports consumer items like phones, furniture, water coolers, and erickshaws, to name few, mainly from China. India can easily manufacture these by doing reverse engineering which China does with everything, from phones to military aircrafts. Private firms in India may not manufacture these consumer items as they would not like to have loss making plants but the government should manufacture these by providing subsidies which China does with majority of items it manufactures. Also one manufacturing job creates additional jobs as the worker would buy consumer items like say food, clothes and car, children would go to school and he would rent or construct house, increasing spending in housing sector. Hence by importing items like furniture, country is losing these additional jobs apart from the manufacturing jobs directly associated with the item in consideration.

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