GDP and Indian Foreign Trade By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

November 20, 2015 | Posted by bobbysrinivasan << back to blog

It is useful to recall the four basic components of Gross Domestic Product (GDP). These components are Consumption (C), Investment (I), Government spending (G) and net exports, consisting of exports (X), minus imports (M). The overall growth definition is expressed in the following equation GDP = C+I+G=(X-M)

An economy that is in trouble will find the consumption with either low growth or no growth at all. Also the business will not invest unless they are sure that the investment will boost the current or future consumption. When these two components are not doing their job the government could come in (Keynesian style) and spend to fill the vacuum. This may result in higher taxes or borrowing or both.

Let us new look at our foreign trade. Exports of goods slid for the eleventh consecutive month falling 17.53% to $ 21.35 billion (It was as high as $ 25.9 billion in October 2015) compared to the same month last year.

The decline was across sectors including engineering, gems and jewellery, leather and chemicals. However, sectors such as pharmaceuticals, readymade garments, carpets and ceramics posted growth in exports. At this rate of exports, we will not achieve the target of $300 billion of exports annually. It is more like 260-270 billion a year. Reverting to imports, it fell by 21.15% to $ 31.12 billion during the month. Thanks to the sharp decline in gold, silver, petroleum products, project goods and coal (imports was as high 39.46 billion in October 2014).

There are several observations that can be made from the data,

The combined annual import, export will be in the range of 600-650 billion dollars.
The Indian government had set a target of 1 trillion and so our target becomes a distant dream.
Given the global deflationary trends and reduced commodity prices, I don’t see an improvement in these numbers.
Merchandise trade deficit is reducing significantly. This is not by itself good news. Our exports are going down steadily.
The global deflation is cutting deeply both into our imports and exports.
The price of crude oil has dropped $ 5 a barrel in one month from 45 to 40 for WTI.
The gold price has plummeted from 1180 an Oz to 1077 today in a month of time. 10% drop for one month.

It is unreasonable to expect the foreign trade to improve. This will hurt the job creation. The reduced trade deficit may contribute to improve GDP but that is only a mirage. We need a vibrant foreign trade. China is looking at this component as part of their GDP which has dropped to 6.9%. In all probability a big devaluation is awaited from China in the next 6 months. In summary shrinking foreign trade is not a good thing for the economy.

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