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Threats to the multilateral trading system are worrisome

Young Bites. Dated: 7/17/2018 11:24:14 AM

India’s merchandise trade deficit in June has soared to $16.60 billion, the highest since May 2013. This comes even as the US and China engage in an escalating trade war; the White House has threatened to impose additional tariffs of 10 per cent on $200 billion worth of Chinese exports, on top of the 25 per cent on an already announced or effective $50 billion. There are some who believe the ongoing tensions won’t affect India much, as it is not an export-oriented economy unlike China. The fact that the Bombay Stock Exchange’s Sensex has risen 7.3 per cent so far this calendar year, as against the 14.4 per cent shed by the Shanghai Composite Index, also partly reinforces this belief. The above logic is, however, flawed. Even from a stock market perspective, the Sensex, which only tracks the top 30 listed companies, isn’t the best indicator. The BSE-150 MidCap Index, which is more broad-based and representative, is down by 9.1 per cent since the start of the year. Stock prices also cannot be a true barometer of the economy in today’s context, where global oil prices, the rupee’s exchange rate and interest rate movements probably matter more. Coming to trade, exports of goods and services, according to World Bank data, constituted 18.9 per cent of India’s GDP in 2017, which wasn’t much below China’s 19.8 per cent. Not only isn’t the share of exports to the overall economy insignificant, its contribution to jobs and incomes, too, is equally underestimated. The really troubling part about India’s export performance in the last one year is the low/negative growth seen in employment-intensive industries such as readymade garments, gems and jewellery, leather products, handicrafts and carpets. Even the agrarian distress during this government’s tenure owes no less to low prices from diminished export opportunities, whether in milk powder, oilseed meals, cotton, maize or guar gum. Trade, in short, matters. While India has reasons to be concerned over the current threats to the multilateral trading system, that shouldn’t, however, stop it from focussing more on exports. The fact that the Bombay Stock Exchange’s Sensex has risen 7.3 per cent so far this calendar year, as against the 14.4 per cent shed by the Shanghai Composite Index, also partly reinforces this belief. The above logic is, however, flawed. Even from a stock market perspective, the Sensex, which only tracks the top 30 listed companies, isn’t the best indicator. The BSE-150 MidCap Index, which is more broad-based and representative, is down by 9.1 per cent since the start of the year. Stock prices also cannot be a true barometer of the economy in today’s context, where global oil prices, the rupee’s exchange rate and interest rate movements probably matter more. Coming to trade, exports of goods and services, according to World Bank data, constituted 18.9 per cent of India’s GDP in 2017, which wasn’t much below China’s 19.8 per cent. Not only isn’t the share of exports to the overall economy insignificant, its contribution to jobs and incomes, too, is equally underestimated. The really troubling part about India’s export performance in the last one year is the low/negative growth seen in employment-intensive industries such as readymade garments, gems and jewellery, leather products, handicrafts and carpets. Even the agrarian distress during this government’s tenure owes no less to low prices from diminished export opportunities, whether in milk powder, oilseed meals, cotton, maize or guar gum. Trade, in short, matters.