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MOSL: FUEL OR ENGINES (ECONOMY)-Side-effect of India’s high economic growth

FUEL OR ENGINES (ECONOMY): Side-effect of India’s high economic growth; Economy posts first-ever¹ deficit on consumption basket

 

• After witnessing a sharp reduction in foreign merchandise trade deficit from 10.4% of GDP in FY13 to 4.8% in FY17, Indian economy witnessed a surge in deficit to 6.2% in FY18, which is likely to increase further in FY19. A comparison of FY18 with FY13 reveals that while deficit on oil, valuables and investments² has improved, the economy posted it’s first-ever deficit on the consumption³ basket in FY18 v/s a surplus of 1.3% of GDP in FY13.
• Further, details confirm that record-high deficit on electronic goods and record-low surplus on textiles led to the first deficit on the consumption basket. It is, however, comforting to learn that India’s surplus on agricultural items is still maintained.
• First-ever deficit on consumption basket was driven by a severe slump in such exports (average decline of 0.9% between FY14 and FY18), but continued decent growth in its imports. The former reflects India’s loss to competitors; such as Vietnam and Bangladesh, while the latter shows resilient domestic consumption.
• Overall, while India’s reliance on fuel and obsession with valuables remain, a sharp deterioration in trade balances in other items – and more importantly, consumption – is a serious concern. Such trends reflect lack of export competitiveness, a possible reverse import substitution or a combination of both. None of these bode well for a labor-abundant emerging economy such as India.