In World Economy News 23/04/2015
Both China and India have reported a steep decline in exports this month. However, this data doesn’t show the shift in the global economy: that India is now more closely integrated with the world economy than China is.
It is well-known that the Chinese economic success story was powered by exports. But since 2008, China has been trying to rebalance its economy towards domestic demand. On the other hand, India was never that dependent on exports for its economic growth.
The shifts in the trade intensity of the two Asian emerging giants should be seen against the broader backdrop of a slowing world economy. According to the latest forecast of the International Monetary Fund (IMF), global growth in trade over the next few years is likely to be a lot slower than in the past two decades.
During the crash of 2008, both China and India witnessed trade contraction. But the dip was far sharper for China as it depended heavily on an export-led growth strategy. India’s exports, owing to limited exposure, were affected by a lesser margin.
Subsequently, India’s imports grew rapidly, as reflected by the widening current account deficit during this period. Since then, imports have been the driver of India’s consistently increasing trade-to-GDP ratio, while falling exports have brought China’s trade-to-GDP ratio down.
This trend is likely to continue over the next few years as the Chinese government continues to rebalance its economy steering it away from external demand, and the Indian economy’s faster growth rate, along with appetite for imported products, is likely to raise India’s trade-to-GDP ratio.
Two of India’s key exports, petroleum products and gems and jewellery, came from imports of raw materials required for manufacturing these products. It is unlikely that India could wean off such critical economic sectors any time soon.
Besides, the push to “Make in India” could actually raise imports more than exports, at least in the short run.
If “Make in India” were to be implemented in earnest, it would lead to a surge in the imports of advanced machinery, given that foreign manufacturers setting up shop in India would raise the demand for such goods, said Biswajit Dhar, a trade economist and professor at Jawaharlal Nehru University (JNU), New Delhi. The export gains from such investments in manufacturing may not be substantial, however, if India’s past record is anything to go by.
“In the past, most foreign direct investments in India have been market-seeking, which means that foreign manufacturers merely exploited India’s domestic demand, instead of exporting,” said Dhar.
India’s trade-to-GDP ratio will still go up, but the likely driver will be imports instead of exports.
