India’s current account deficit looks endemic.

The Indian economy’s woes with respect to exports appear to be the twin problems of low savings—caused by reckless fiscal policy—and some evidence on falling export competitiveness, says Espirito Santo Securities

India is suffering from a serious current account deficit which appears to be because of the twin problems of low savings, caused by reckless fiscal policy, and evidence of falling export competitiveness. This is according to Espirito Santo Securities in its Fundamental Insights Report of November 2012.

 

Espirito Santo observes that the top sectors in Indian exports with the highest RCAs (Relative Comparative Advantage) are i.e. largely ‘traditional’ sectors: gems & jewellery, rice, spices, cotton, tea, textile fibres, organic chemicals and petroleum products. The new entrants include base metals (e.g. zinc with its RCA up from 0.1 in 2000 to 3.4 in 2011).

Similar sharp increases in RCAs were seen in pig iron, lead, copper and mineral products. Within transportation, India has increased its relative comparative advantage in “ships, boats & floating structures”, ‘tractors’ and “motorcycles & cycles”.

 

India’s exports seem more diversified than China’s, though the degree of diversification has fallen somewhat in the last few years, says Espirito Santo.

But, contrary to conventional wisdom, which associates diversification of Indian exports with rising competitiveness in more non-traditional (manufacturing based) sectors, this doesn’t seem to stack up.

Regarding manufactured goods, like China, India has gone beyond the initial industrialisation stage, reflected in reduced specialisation in traditional manufacturing such as textiles.

But China is now far more specialised in innovative sectors like electronic data processing, telecommunications equipment and also (to a certain extent) integrated circuits and electronic components. An opposite trend is seen in chemicals, where India seems to have a distinct relative comparative advantage.
 

While India has been able to maintain its comparative advantage in tea, coffee, spices and marine products, it has lost comparative advantage in export of some agricultural commodities to other Asian competitors during the period after economic reforms. Tea has suffered one of the sharpest falls in RCA since 2000, with Sri Lanka increasingly dominant.

Hence the level of interest by the Indian tea firms in acquisition of plantations in Africa and Sri Lanka. The RCA of coffee has also fallen sharply from 3.5 in 2000 to 1.3 in 2012. In coffee exports, Indonesia, Thailand and Vietnam are the major competitors to India.

The computed RCA values for India were positive for all the years and indicated its comparative advantage in coffee exports. But, Indonesia and Vietnam have outperformed India.

 

Rice exports, accounting for 1.5% of India exports in 2011, witnessed varied levels of RCA with a net rise from 2000 to 2005, but a net fall from 2005 to 2011. India’s status remained inferior to its major Asian competitors (Pakistan, Thailand and Vietnam) in almost all the years.

Post-2000 seemed to have a detrimental effect on exports of spices, with the RCA falling from 14.3 in 2000 to 9.6 in 2005, with a corresponding sharp increase in competitiveness of China’s spices’ exports.



The labour-intensive sectors of gems & jewellery and agriculture products and the scale-intensive sectors of chemicals are the foremost sectors enjoying a comparative advantage in India, observes Espirito Santo.
 

The steady deterioration in India’s trade deficit and current account deficit has been one of the key factors exacerbating the external sector risks for India. While export demand is a function of a multitude of factors, the key ones are global demand for exports and competitiveness.

While falling global demand has no doubt impacted India’s exports (down 7.5% FYTD), falling comparative advantage in key sectors is one of the reasons impacting the long-term export growth trajectory for the Indian economy, according to Espirito Santo.

Source : moneylife.in