CAD Situation Has Worsened In Last 1 Year
Analysts expect Current Account Deficit (CAD) to increase to 2.8% of GDP in the current financial year of 2018-19. It was only 0.6% and 1.9% of GDP in 2016-17 and 2017-18 respectively. Rising oil prices, overall increase in non-oil imports and outflow of foreign portfolio investments have compounded the problems and also leading to depreciation of rupee. CAD, which is difference between inflow and outflow of foreign exchange, increased to US $ 47.8 Billion in 2017-18 from just US $ 14.4 Billion in 2016-17. CAD remains a risk to overall health of Indian economy resulting in uncertainties of critical parameters like interest rate, inflation, energy security, rupee depreciation, investment etc.
Trade deficit is a most important factor in determining CAD. With increase in crude prices and other imports the situation has further worsened in 2018-19 as indicated by following table. (in billion dollars) | Year (period Apr-Aug) | Exports (incl services) | Imports (incl services) | Trade Balance (Exports-Imports) |
| 2017-18 | 184 | 223 | 39 |
| 2018-19 | 222 | 270 | 48 |
Trade deficit has increased by 25% for corresponding period in 2017-18 and 2018-19 Merchandise trade numbers that excludes services but includes commodities and other trade | Year (period Apr-Aug) | Exports (excl services) | Imports (excl services) | Trade Balance (Exports-Imports) |
| 2017-18 | 117 | 185 | 68 |
| 2018-19 | 136 | 216 | 80 |
What Contributes To Spiralling CAD?
- Imports of major commodities like oil and oil products, electronic goods, gold, pearls and precious stones and machinery have grown at more than 25% in 2017-18 as compared to average export growth of 9.98% in rupee terms.
- In April-Aug 2018 period crude imports increased by 53% for comparable period in 2017-18.
- Electronic goods at over Rs. 52,000 crores continue to occupy second spot in imports of India and they have grown at over 23% in the last year.
- Pearls / precious stones as well as gold have registered over 33% growth in import value in rupees over last year.
- Coal and metcoke imports have increased by 45% vis-à-vis 2016-17.
Action Plan To Control CAD By Eliminating Or Minimising Trade Deficit
| Serial No | Action | Sub-Action | Impact | Target Timeframe |
| 1 | Reduce dependence on crude imports and reduce pollution | Use of CNG in cars and smaller vehicles - Use of LNG in heavy vehicles instead of petrol and diesel.
- Incentivise cheaper conversion kits, lower taxes on CNG/LNG
- Tax incentives to CNG cars and LNG heavy vehicles such as registration fees and permitting
- Incentivise investment in gas infrastructure for supply of CNG and LNG including import of LNG for transportation
| Reduction of 20 -25% percent in consumption of petrol and diesel | Within 3 years |
Use of biofuels for blending with transportation fuel - Maximise use of upto 30% for blending blending of biofuels
- Firm up an effective biofuel policy to incentivise use of second generation ethanol manufacture using agri-waste to incentivise investment and offer viable pricing for bio-fuel manufactures
| Reduction of upto 20% of consumption of petrol and diesel | Within 5 years |
Shared mobility and use of Electric vehicles - Allow import of electric cars by manufacturers at concessional import duty with a condition that they will set up manufacturing facilities in India within 5 years along with full transfer of technology including batteries and all components
- Increase GST on cars above 1000 cc engines to incentivise switchover to EVs
- Accelerated policy rollout for promoting investment in charging infrastructure
- All mass transport vehicles to shift to EVs in a timebound manner
| Reduce individual car ownership and Extinction of IC engine vehicles | Move to complete electric vehicles by 2030 |
| 2 | Imports of coal for power generation | Eliminate import of coal for power generation in India - India has sufficient reserves to fulfil domestic coal requirement. Improved productivity of coal mines in India to boost production from current level. Achieve the same by modernisation of mining equipment and technology. Make use of large equipment and efficient mining practices in Indian coal mines.
- Accelerate implementation of commercial mining with pre-conditions of better productivity, quality and safety standards
- Alternate use of coal like coal gasification that supplements gas sources for India
| Use of only indigenous coal in India | Within 5 years |
| 3 | Electronic goods including phones, | Completely stop imports of electronic and white goods - Creation of special electronic manufacture zones across the country with tax incentives to manufacture these items and also their components at global scale and quality
- Technology transfer by companies setting up manufacturing base should be mandatory
- Focus to create export oriented units
- Truly implement make-in-India
| World class facilities that completely take care of Indian demand with state-of-the-art products. Generation of employment | Stop imports of these items in 5 years |
| 4 | Machinery, transport & defence equipment | Development of IPR and world class manufacturing facilities in India - With an objective to become a global leader in these products, create a dedicated pool of 2000 brilliant engineers and industry leaders funded by the government to develop technical know-how to develop world class products. Inclusion of private players in this initiative to develop technologies
- Move from a role of component producer and assembler to cutting edge technology product developer and manufacturer
- Similar to electronic goods create special manufacturing zones with tax incentives also including the component manufacturers
- To promote national security and promote indigenous manufacture of defence items, keep upto 10% bid advantage for domestic producers
- This should have a very short payback due to boosting of domestic manufacturing activity and generation of employment
| | Target to become export capable country for precision machinery, transportation and defence equipment within next 5 to 8 years with phased targets |
Conclusion
| | 2016-17 | 2017-18 | Change |
| Metaliferous & other minerals | 43,358 | 63,651 | 46.79% |
| Coal, coke and briquettes etc | 110,320 | 160,307 | 45.31% |
| Pearls, precious/semi-prec.stones | 166,663 | 239,953 | 43.98% |
| Non-ferrous metals | 69,083 | 89,684 | 29.82% |
| Iron and Steel | 81,781 | 102,326 | 25.12% |
| Petroleum, crude and products | 608,748 | 760,613 | 24.95% |
| Organic & inorganic chemicals | 116,186 | 144,417 | 24.30% |
| Electronic Goods | 300,153 | 370,237 | 23.35% |
| Gold | 192,626 | 235,599 | 22.31% |
| Artificial resins, plastic materials | 83,748 | 101,416 | 21.09% |
| Machinery, elec.&non-elec. | 192,479 | 230,363 | 19.68% |
| Vegetable Oil | 76,251 | 81,459 | 6.84% |
| Transport equipment | 158,816 | 159,131 | 0.20% |
| Total Imports | 2,690,499 | 3,259,046 | 21.13% |
| Total Exports | 1,930,964 | 2,123,632 | 9.98% |
| Import/export values in Rs./crores | | | Source: DGCI&S Kolkata |
Reduction of crude imports is a most important priority for India for achieving growth, currency stability, energy security and control of inflation. Development and manufacture of products meeting global standards using cutting edge technology and not just becoming an outsourced manufacturer of components is the key to India permanently overcoming the issue of trade deficit by becoming an export capable economy. Unlike all major developed economies, leapfrogging manufacturing and depending significantly on service industry to achieve growth is hurting India. Focus has to shift to value added manufacturing that has the potential to generate both high technology as well as sustainable jobs and also address the issue of ever increasing imports of goods that Indians are perfectly capable of producing and exporting.