Mar 22nd 2006, C.P. Chandrasekhar and Jayati Ghosh

Recent trade patterns in India have been characterised by a burgeoning trade deficit despite very high rates of growth of export, which implies that import growth in value terms has been even more rapid. Indeed, the past few years have witnessed the highest rate of growth of imports of any three year period in the past thirty years.
Chart 1 >>

As Chart 1 shows, this is reflected in a dramatically increased trade deficit, to as much as $27.8 billion by 2004-05, and the early estimates suggest an even greater increase in the current year. Imports now account for around 17 per cent of GDP. It is often suggested that the recent increase in imports reflects higher values of oil imports as international oil prices have increased. Yet Chart 2 makes it evident that non-oil imports have also risen very fast, indeed faster than oil imports especially in the most recent period.
Chart 2 >>

In fact, oil imports as per cent of total imports have fallen from an average of 40 per cent in the early 1980s to 28 per cent between 2002-03 and 2004-05. The general presumption that high levels of oil import values are due to high international prices is also misplaced: there has also been very substantial increase in import volumes in oil, as Chart 3 shows.

Between 1990-91 and 2003-04, both the quantum index and the unit value index for oil imports increased around threefold, and in fact the increase in the quantum index was slightly more than in unit values. This suggests that the Indian economy has tended to become much more dependent upon oil, both because of increasing energy intensity of some manufacturing production in particular, as well as because other sources of energy have not increased relative to requirements.
Chart 3 >>

While capital goods have continued to be important among imports, their share has fallen from 25 per cent of total imports in the period 1987-88 to 1989-90, to 22 per cent in the last three years. Within the broad category of capital goods, the most significant changes have been the general decline in the share of project goods imports and the emergence of electronic goods imports, which currently have the highest share in this category. The decline of project goods imports in a period of relatively high domestic investment rates probably reflects the effect of declining tariffs on all other capital, which has reduced the differential duty advantage that project goods imports had in the past.
Chart 4 >>

Imports that are officially defined as related to exports, that is which provide raw material or intermediates for export production only, have fluctuated between 15 and 19 per cent of total imports, with no clear trend. Most of these are items such as pearls and stones for the gems and jewellery industry (which is dominantly export-oriented) as well as certain chemicals, textiles and fabrics and so on. Of course, this excludes the large range of other imports that are directly and indirectly used by exporting industries, just as it assumes that these imports are used only for export production.

However, bearing this official classification in mind, it is possible to work out the share of such imports to exports in each of these sectors, as described in Chart 5. This provides a mixed picture. In some categories such as cashews, the ratio of imports to exports has been increasing and is now very high at around 80 per cent. Similarly gems and jewellery indicate a very high such ratio of around 70 per cent on average, although there does appear to have been a slight decrease from 77 per cent in the period 1987-88 to 1989-90 to 68 per cent in the latest three year period.

In the case of chemicals, imports were greater than exports at the start of this period and have declined to about 45 per cent of exports in the latest three year period. Textiles and clothing shows a relatively low ratio, although it has been rising especially in recent years, and now imports in this sector account for 12 per cent of the value of exports.
Chart 5 >>

Charts 6 and 7 indicate the movement of quantum and unit value indices for general manufactured goods imports and imports of machinery and transport equipment, respectively. The important point to note here is that the movement of the quantum indices has been much faster and sharper upwards than that of unit values. Indeed, for both of these sectors, unit values have been broadly stable between 199-98 and 2003-04, but import volumes have shot up. In the case of general manufactured goods, import volumes have increased by more than 80 per cent in the same period, while import volumes for machinery and transport equipment have increased by more than 100 per cent.
Chart 6 >>       


Chart 7 >>

What this suggests is that actual import penetration and displacement of domestic production is likely to have been much greater than is suggested by the movement of import values alone. The influx of imports into the Indian economy has been especially sharp in terms of volumes of manufactured goods, and is it widely perceived that they have had the most deleterious competitive impact upon small scale producers. Since small scale industry is not only more employment intensive but also employs the greater bulk of manufacturing workers anyway, this must be a major contributor to the slow growth of employment in manufacturing that has been marked and reiterated once again in the latest NSS Survey of 2004.

Overall, recent trends in imports point to some areas of concern. First, the continuing high dependence upon oil imports, reflecting not just price factors but also even sharper increases in volumes. Second, the increase in manufacturing imports which are not dominantly for export processing but essentially replace domestic production. This impact is even greater than is suggested by share of import values to domestic value added, since volumes have increased dramatically and much faster than unit values.

So the Indian economy is clearly undergoing a restructuring because of greater trade openness. The problem is that such restructuring appears to be associated with a further collapse of employment generation in an economy that is already characterised by large levels of both open and disguised unemployment.