The Trade Push
Context: In the backdrop of the contraction in exports due to COVID-19 pandemic and worsened global economic situation, focused policy intervention from both the government and the RBI is needed for pushing up exports.
Current macro-economic situation:
- Overall economic recovery: Despite the government expecting a v-shaped recovery, recovery is likely to be gradual as the rising infection continues to affect the pace of economic activity as per the RBI Governor.
- Higher trade deficit :Even as the imports have fallen due to weak demand, contraction in exports has led to rise in trade deficit.
- Weak domestic demand: as economic activity is gradually recovering and the increase in the trade deficit is largely driven by gold imports.
- Fiscal deficit and public debt: Huge expansion in this in current fiscal year will lead to weak demand in the coming years owing to lower government expenditure as it balances the budget
Economic Expectations:
In the near term : Reduction in the balance of payments surplus will allow the RBI to lessen intervention in the currency market and will open up some space for the central bank to intervene in the bond market.
In the medium term: However, India will need to focus on exports for sustainable growth.
Managing the trade deficit and pushing exports:
- Participation in global value chain: is very low due to protectionist bend of India’s trade policy.
- Enabling a seamless movement of goods across borders
- Reducing the high tariffs and policy uncertainty
- Reducing random policy changes: such as the recent ban on onion exports that affect India’s position as a dependable supplier.
- Maintenance of fair value of Rupee: by the RBI as flow of foreign funds can increase as US Federal Reserve has indicated that the policy rate will remain near zero till 2023
Conclusion: As the global economy stabilises, and the outlook improves on the trade front, India will need to capitalise on increasing exports. This will need efforts from both, the government and the RBI.
