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74% rise in electronic goods imports: will stronger rupee kill Digital India?

Neeraj Thakur | Updated on: 18 May 2017, 14:19 IST
(Arya Sharma/Catch News)

Merchandise exports from India grew by 19% year on year to $24.63 billion in April 2017, a growth reflective of the improving global economy.

However, in the same month, India's imports grew by 49% to $37.88 billion, leading to the highest trade deficit since November 2014 – $13.2 billion.

The government's response to this, published in several newspapers, suggests that higher imports are reflective of a healthy economy, and must not be considered as a cause of concern.

But increased imports are healthy only as long as they help the economy produce more, either for the domestic market or for the rest of the world.

Good news, bad news

An unchecked increase in consumable products through imports may lead to significant foreign exchange reserve losses.

Therefore, increase in the value of oil imports of 30.1% to $7.3 billion is acceptable, as the country exported petroleum products worth $2.9 billion, an increase of 48.7%, in April 2017.

Similarly, increases of 34.8% in chemicals imports, 51.7% in pearls and precious/semi-precious stones imports; 95% in coal imports, 37.4% in machinery imports and 30.1% in transport equipment imports can be considered good news.

All these products are either re-exported or help in the production of domestic goods.

But there are two pieces of bad news:

- Gold imports in April surged by 211.35% to $3.8 billion

- Import of electronic items surged by 74.1% to $4.4 billion.

Stronger rupee the culprit

Gold and electronic items have been a major cause of concern for India's current account deficit in the past.

For the first 11 months of 2016-17 (April-February), gold imports had contracted 24.5% to $23.1 billion, whereas electronic imports had risen by 2.6%.

Therefore, a sudden pick up in the import of these two items cannot be attributed to a sudden strengthening of the Indian economy. Rather, a stronger rupee looks more like the culprit in this case.

Since 1 January this year, the Indian rupee has appreciated by 5.94% against the US dollar, while the Chinese yuan (most electronic imports come from China) has depreciated by 0.14% in the same period.

Economists, including India's Chief Economic Advisor, Arvind Subramanian, have warned against the appreciation of the Indian rupee against the dollar, at a time when other economies are depreciating their currencies to make themselves export-competitive.

However, Union Commerce Minister Nirmala Sitharaman has said categorically that a stronger rupee is a sign of a healthy economy. Foreign institutional investors (FIIs) have so far bought equities worth $6.77 billion and $7 billion of debt securities in the Indian market.

While the Reserve Bank of India has thetools to ensure that the rupee does not appreciate beyond a certain level, the overarching positive narrative around a stronger rupee might be stopping its intervention.

What happens to Digital India?

According to a report by Deloitte, the demand for electronics hardware in India is projected to increase to $400 billion by 2020. But the domestic production is likely to be around $104 billion, creating a gap of $296 billion.

The NDA government wants to change these projections and, under its Digital India policy, has targeted net zero imports of electronic products by 2020.

This, according to the government, can be achieved through a slew of measures, including tax exemptions, government procurement and ease of doing business.

However, it is a question worth mulling over: why would any manufacturer 'Make in India' if it is cheaper to import 'Made in China' and sell it in India?

India imports 65% of its current demand for electronic products.

Ajay Dua, former secretary of the Department of Industrial Policy and Promotion, is of the view that to promote India's hardware industry, the government will have to resort to protectionist measures by way of putting anti-dumping and countervailing duties on Chinese products.

But there is a catch. Anti-dumping duties have to be justified in the World Trade Organisation, and may not last for a long period of time. While it is largely believed that China has used high subsidies and devalued currency to flood the world's markets with cheap exports, there is not much that governments have been able to achieve against Chinese imports, despite using anti-dumping duties.

Therefore, it is necessary that the Indian government does not blindly subscribe to the idea that 'a stronger currency' reflects 'a stronger economy'.

There should be a scope to re-evaluate the current scenario, and the path that India wants to take on its journey to be a manufacturing powerhouse.

First published: 17 May 2017, 22:59 IST
 
Neeraj Thakur @neerajthakur2

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