The government of India announced a doubling of the gas price it will pay to producers effective

April 2014. While this decision attracted much controversy, the rationale behind it seemed to be
twofold. One was to incentivize investment in exploration and production. The other was to
minimize outflow of foreign exchange due to the import of expensive liquefied natural gas.
Both these reasons are motivated by concerns about the current account deficit, which was 5% of
the gross domestic product in the year ended March, much above the danger mark of 3% notched
up in the crisis year of 1991. In the current fiscal, the trade gap is unlikely to fall below 4%. It is
customary to blame oil and gas imports, as well as gold for the woes. The finance minister has
appealed to the people to reduce gold consumption, as if that would solve the crisis. Import duty
on gold has been quadrupled in the past few years, but that has had little impact on curbing
demand for gold. In any case, there is also a valid debate about whether gold purchases should be
counted in the current or capital account.
The focus on oil and gold tends to obscure other important determinants of the deficit, which are
equally structural, and policy induced. For instance, India has the third largest coal reserves in
the world, and yet imported 135 million tonnes in 2012-13. It remains a substantially agrarian
economy with 15% of GDP and 50% of employment coming from agriculture. Yet, one-third of
the annual consumption of fertilizer has to be imported. This import proportion is rising. Since
farmers pay a subsidized price, it also costs the exchequer Rs1 trillion annually in subsidies,
most of which goes to finance imports. No domestic production capacity has been created in the
fertilizer sector for some two decades. India is one of the largest consumers of edible oils in the
world, which are largely imported as crude palm oil from countries such as Malaysia and
Indonesia.
The ban on iron ore mining in several states has meant that steel producers now have to import
the ore. The less said about the swamping of Chinese imports in sectors as diverse as power
equipment and consumer items, the better. Small and medium enterprises bear most of the brunt
of the Chinese onslaught, legitimate or otherwise. It is worth remembering that half of the total
non-oil trade deficit is with China alone. Of course India-China trade has grown rapidly, and its
a good thing. But its asymmetric growth, and widening bilateral deficit, calls for an urgent policy
fix. Chinas vast consumer market, and its conscious move to rebalance its economy away from
investment spending, and away from export-led growth, means Indias exporters have a big
opportunity.
Most of the Asean partners of China are part of production supply chains, which end up as
exports of finished products from China to the West. But in these chains, the intermediaries are
net exporters to China. India is not yet a part of any such supply chain, although it has gained in
terms of relative wage costs when compared with China.
There is thus much more to the widening trade and current account deficit, than meets the eye.
The best case highlighting structural features underlying the deficit was made in a strategy paper
published by the commerce ministry more than two years ago. It was written when the economy
was just finishing two consecutive years of 9% GDP growth, and it was prescient in anticipating
the deficit crisis. It predicted that by 2013-14, the trade deficit would be close to $300 billion,
almost 12% of GDP, nearly three times as big, in only five years. The accuracy of that forecast is
uncanny, and rather uncharacteristic of various government-produced long-term forecasts. The
sheer size of the trade deficit means that for it to come down below an acceptable level of 3% of
GDP, earnings from services and remittances would have to contribute 9% of GDP, or close to
$180 billion in the current fiscal. It is a herculean challenge, which to the commerce ministrys
credit, was identified long ago. The strategy paper provides various ideas to boost export

earnings, with product and market strategies. As T.N. Ninan recently wrote in the Business
Standard newspaper, India missed the bus on garment exports, with countries such as
Bangladesh, Vietnam and Turkey moving ahead in absolute terms.
But, due to increasing wages in China, there may be a second chance for India to catch the bus
on export opportunities in garments, clothing, fabrics, yarn, carpets and handloom. All this is
dealt with in the ministrys strategy paper. There are other suggestions for electronics, pharma,
light engineering, gems and jewellery and agro processing. The report is remarkably detailed in
its sector-wise recommendations.
An interesting part of the document explores ways of compressing imports. It is here that the
blame is squarely put on domestic policies. The burgeoning imports of edible oils, pulses,
fertilizers, coal and now iron ore, even cellphone instruments, have all benefited from domestic
industrial policy, which at best was negligent, or worse, downright hostile. No amount of rupee
depreciation, or multi-city road shows for foreign direct investment in places such as London,
Hong Kong or Dubai, or fervent appeal to citizens to forego purchases of gold, can undo the
damage done by policy lethargy.
We must now focus on recovering lost ground in labour-intensive exports, increase domestic
production of fertilizer, edible oil, iron ore and coal, and negotiate directly with the Chinese to
swap the trade deficit for inbound Chinese investment. This is a policy agenda mostly identified
by the government itself two years ago, and addresses structural aspects of the trade deficit. We
ignore it at our own peril.