Piyush Goyal Trade Surplus Claim Needs a Reality Check

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India saw first trade surplus in past 18 years in June after which Piyush Goyal, the union minister of commerce and trade, jumped with joy and celebrated it by posting it on twitter. While many people followed him and expressed this as an achievement of Modi government, the so called achievement is way different from reality.

Trade surplus is the amount by which a country’s export exceeds its import. While in normal situation, it is considered as a boon to economy, in recent times, a trade surplus means that India’s imports are falling short, which indirectly means that the manufacturing sector of India, which usually imports raw materials from other countries, is performing poorly.

In other words, this can be understood as global value chains. A large part of the world economy is characterised by global value chains. Decreasing imports mean a decreasing demand in the country. For example, if mobile phone factories were importing batteries and motherboard for the final product, a fall in production of mobile phones will to fall in import of the raw material will lead to fall intheir demands, which leads to fall in import.

Thus the sudden fall in imports is symptomatic of fall in domestic economic activity rather than gains on the import substitution front.

As per World Bank’s WTS database, almost 90% of India’s import constitute of raw material and intermediate goods, which are being assembled to produce the final output. The analysis of imports and exports of June 2019 to June 2020 leads to the conclusion that both import and export has fallen to a great extent.

his, as has been pointed above is most likely a result of a fall in derived demand for intermediate and capital goods arising from a fall in domestic production. This is not good news for the economy. In proportional terms, petroleum imports have more than halved on account of reduced demand due to the implementation of country wide travel restrictions and low crude prices.

Experts agree. The “surprise trade surplus…could be reflective of weak domestic demand, relative to global demand; the weakness in imports was spread across investment and consumption goods”, said a note by Pranjul Bhandari, Chief India Economist at HSBC Securities and Capital Markets Ltd.

Disclaimer :- This post is independently published by the author. Infeed neither backs nor assumes liability for the opinions put forth by the author.

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