India’s Trade Challenges Unique Among the BRICs

March 24, 2013 — Leave a comment

In 2013, the prospects for trade for the BRIC economies (Brazil, Russia, India and China) will diverge. While the BRIC economies have been at the forefront of emerging market growth for the past decade, weaker export demand from the developed world since 2012 is impacting the trade balances of each BRIC country, reports Euromonitor International.

The widening trade deficit for India in particular, the only BRIC member in which imports outstrip exports, is threatening the country’s growth prospects for the year. India’s trade deficit widened in 2012 to 10.3% of GDP, as high oil prices further increased the cost of the country’s imports, while export growth slowed, leading the imbalance to worsen. This is compared to 2.9% surplus in China, 9.9% surplus in Russia and a 0.9% surplus in Brazil in 2012.  Both Russia and Brazil’s exports are buoyed significantly by primary resources, such as oil and gas. Euromonitor International expects India’s trade deficit to widen to 12.3% in 2013.

GREENEARTH INDIA 3India’s situation is unique. The country has not posted an annual trade surplus since at least 1977, primarily due to two key factors. First of all the country is highly dependent on imports of energy to maintain the country’s energy consumption. For example, the country imports 75.2% of the crude oil that it consumes, as a result, in 2012, imports of mineral fuels accounted for 33.9% of the country’s import bill. The rising costs of fossil fuels after 2010, as well as the low levels of energy efficiency have exacerbated India’s trade deficit issues;

Secondly, the economy’s external sector remains comparatively small in comparison with the other BRIC economies. The Indian economy has maintained growth through rising domestic spending and a burgeoning services sector, which in 2012 made up 53.4% of the economy. As a result, India’s exports made up just 15.7% of the country’s GDP in 2012, compared to 25.3% in China and 27.2% in Russia, Brazil is the exception with exports making up just 10.8% of GDP in the year;

However, over the majority of the period studied, the trade deficit has been offset by capital accumulation in India from FDI inflows into the country. Since 2006, a rapid acceleration in imports has led to a much larger trade deficit, while the financial crisis of 2007-2008 has meant FDI flows have tightened across the world. The trade deficit is therefore, a growing burden for India, as capital is diverted from India’s economy to fund rising import costs.

Although there are challenges for India’s external sector in 2013, the economy has seen very high trade growth, the fastest of the BRIC economies. Between 2007 and 2012, exports increased by 103.6% in US$ terms, while imports increased by 123.2%. Growth will continue in 2013, with 15.2% increase in exports and a 22.2% increase in imports. The rapid growth is a result of a burgeoning middle class and the development of export industries in the country. The long term prospects for India remain bright as a result, as the growing population and continued economic development offer considerable opportunities for investment. However, the trade deficit will continue to drag on economic growth until investor confidence in India returns. Source: Euromonitor International

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