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Avoiding BOP Crisis:Manufacturing Trade Deficit and Industrial Policy in
India
Sudip [email protected]
Indian Institute of Management Calcutta
Mattukadu Conference25‐27 January, 2010
Outline
Current Account & Trade deficit
BOP Crisis in 1991 and Policy response
Current Account & Trade deficit
Manufacturing Trade deficit
Role of earlier Industrial Policy
Absence of Industrial Policy now
Conclusion2
Policy response to BOP Crisis of 1991Policy response to BOP Crisis of 1991
– Not only “Stabilization”Not only Stabilization
– But also “Structural adjustment” including:• Long term trade and Industrial reformsLong term trade and Industrial reforms
3
Trade DeficitTrade Deficit
• Both Trade deficit and Current Account deficitBoth Trade deficit and Current Account deficit (CAD) around ‐3% of GDP in 1990‐91
• Trade deficit (S Ch t 1)• Trade deficit (See Chart 1):– Worsened to ‐4% in 1999‐2000
Af i ill 2002 03 ( 2 1%)– After some improvements till 2002‐03 (‐2.1%),
– Started deteriorating again from 2003‐04 (i.e., b f th US Fi i l i i )before the US Financial crisis):
• ‐4.8% in 2004‐05
• 10 2% in 2008 09• ‐10.2% in 2008‐09
4
Current Account deficitCurrent Account deficit
• Steadily improved to +2.32% (2003‐04)Steadily improved to 2.32% (2003 04)• Deteriorated since then reaching ‐2.5% in 2008‐09 (See Chart 2)2008 09 (See Chart 2)
• Two important factors – software exports and private remittances (See Chart 3)private remittances (See Chart 3)
• Problem much more severe than what the figures suggest because of volatile nature of:figures suggest because of volatile nature of:– Private remittances– Foreign Institutional investment g
5
Chart 1: Trade deficit as % of GDP
‐2.00
0.00
‐4.00
‐8.00
‐6.00
‐12 00
‐10.00
12.00
1990
‐91
1991
‐92
1992
‐93
1993
‐94
1994
‐95
1995
‐96
1996
‐97
1997
‐98
1998
‐99
999‐2000
2000
‐01
2001
‐02
2002
‐03
2003
‐04
2004
‐05
2005
‐06
2006
‐07
2007
‐08
2008
‐09
19
Source of BOP data: Reserve Bank of India 6
3 00
Chart 2: Current account as % of GDP
2.00
3.00
0.00
1.00
‐2.00
‐1.00
4 00
‐3.00
‐4.00
1990
‐91
1991
‐92
1992
‐93
1993
‐94
1994
‐95
1995
‐96
1996
‐97
1997
‐98
1998
‐99
99‐2000
2000
‐01
2001
‐02
2002
‐03
2003
‐04
2004
‐05
2005
‐06
2006
‐07
2007
‐08
2008
‐09
1 1 1 1 1 1 1 1 1
199 2 2 2 2 2 2 2 2 2
7
Chart 3: AS % of GDP
3.50
4.00
4.50
2.00
2.50
3.00
0.50
1.00
1.50
0.00
990‐91
991‐92
992‐93
993‐94
994‐95
995‐96
996‐97
997‐98
998‐99
9‐2000
000‐01
001‐02
002‐03
003‐04
004‐05
005‐06
006‐07
007‐08
008‐09
19 19 19 19 19 19 19 19 19
1999 20 20 20 20 20 20 20 20 20
Software net exports Private remittances net
8
Manufacturing Trade deficitManufacturing Trade deficit
• Trade deficit primarily caused by fuels deficit (See ade de c t p a y caused by ue s de c t (SeeChart 4)
• Surplus manufacturing trade balance (See Chart 5):↑ to +2.4% in 2000‐2001Since then:
↓ t 0 36% i 2006• ↓ to ‐ 0.36% in 2006• ↓ to ‐2.4% in 2008
• Does the Surplus reflect success of Trade &Does the Surplus reflect success of Trade & Industrial Reforms?
• Significance of deterioration since 2000‐2001? g
9
Chart 4: Trade deficit as % of GDP
0.002.004.00
8 00‐6.00‐4.00‐2.00
‐12.00‐10.00‐8.00
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
199
199
199
199
199
199
199
199
199
199
200
200
200
200
200
200
200
200
200
Agricultutal raw materials All food item
Fuels Mfrg goodsFuels Mfrg goods
Ores and metals
Source of manufacturing trade data, India and China: calculated fromUN COMTRADE data base (http://comtrade.un.org/db/)Note: Total = SITC‐Rev 2 Codes 0 to 8; Mfrg = Codes 5+6+7+8‐68 10
Chart 5: Mfrg trade deficit as % of GDP
2.00
3.00
g
1.00
0.00
‐2.00
‐1.00
‐3.00
990
991
992
993
994
995
996
997
998
999
000
001
002
003
004
005
006
007
008
1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2
11
Manufacturing TradeManufacturing Trade
• Break not in 1991 but in mid‐1980s and earlyBreak not in 1991 but in mid 1980s and early 2000s (See Charts 6, 7 & 8)
CARG MfrgExports (%)
CARG MfrgImports (%)
Deficit
↑1980‐85 7 13 ↑
1985‐2001 12 6 ↓
2001‐08 19 30 ↑
12
A % f GDPAs % of GDP
Mfrgexports
MfrgImports
Mfrg trade balance
1978 2.97 2.93 +0.04
1980 2.85 3.16 ‐0.17
1985 2.59 4.38 ‐1.79
2001 7.36 4.96 +2.40
2005 9.92 9.40 +0.52
2008 10 41 12 78 ‐2 382008 10.41 12.78 2.38
13
Chart 6: Mfrg Trade deficit as % of GDP
2 00
3.00
Chart 6: Mfrg Trade deficit as % of GDP
1.00
2.00
1 00
0.00
‐2.00
‐1.00
‐3.00
14
Chart 7: As % of GDP
12.00
14.00
Chart 7: As % of GDP
6.00
8.00
10.00
2.00
4.00
‐4.00
‐2.00
0.00
Mfrg export Mfrg import Mfrg balanceMfrg export Mfrg import Mfrg balance
15
Chart 8:Manufacturing Trade ($ billion)
120.00
140.00
160.00
60 00
80.00
100.00
20.00
40.00
60.00
‐40.00
‐20.00
0.00
Mfrg export Mfrg import Mfrg balanceMfrg export Mfrg import Mfrg balance
16
Role of earlier Industrial Policy
17
Sources of Export Growth, 1985‐2001Sources of Export Growth, 1985 2001
• 14 sectors each (> 1%) contributed to 70% of14 sectors each (> 1%) contributed to 70% of total increase– Textile yarn fabrics garments etc 31%– Textile yarn, fabrics, garments etc 31%
– Gems & jewelry 20.1%
Pharmaceuticals 4 3%– Pharmaceuticals 4.3%
– (Others: footwear, automobile parts
i l i t t i & t lmusical instruments, iron & steel
products etc) 1% each
18
Sources of Export Growth, 2001‐2008Sources of Export Growth, 2001 2008
• 20 sectors each (> 1%) contributed to 65% of20 sectors each (> 1%) contributed to 65% of total increase: – Gems & jewelry 16.2%j y– Textiles 9.6%– Pharmaceuticals 5.6%– Tubes/pipes; Ships/boats 3.2% each– Motor vehicles, iron & steel plates etc 2% each– Automobile parts, footwear, electrical machinery etc 1% each
19
Industrial PolicyIndustrial Policy
• In the past has been a major factor behind the t e past as bee a ajo acto be d t esuccess of industries such as pharmaceuticals, iron & steel, motor vehicles and parts
• Pharmaceuticals– Public investments in Manufacturing and R&D– Abolition of product patent protectionTake off in 1980s (See Chart 9)– Take‐off in 1980s (See Chart 9)
• Similarly for Motor vehicle parts: take off in mid‐1980s (See Chart 10)1980s (See Chart 10)
20
Chart 9: Exports of Pharmaceuticals
7000
Chart 9: Exports of Pharmaceuticals($ million)
5000
6000
3000
4000
1000
2000
0
21
Chart 10: Exports of motor vehicle partsChart 10: Exports of motor vehicle parts ($million)
160001800020000
100001200014000
2000400060008000
02000
22
Absence of Industrial Policy now
23
Import GrowthImport Growth
• Moderate growth 1985 to 2000‐2001Moderate growth, 1985 to 2000 2001 reflects the success of past Industrial Policy (See Chart 7)Policy (See Chart 7)
• BUT, sharp increase in imports since 2000 2001 reflect the failure to develop2000‐2001 reflect the failure to develop new industries (See Chart 7)
h l d l• Growth rate accelerated in early 2000s (GDP and services) (Charts 11 &12) , but ATPs lagged behind (Charts 13 to 17)
24
Chart 11: GDP Growth rate
10
12
8
4
6
2
0
990‐91
991‐92
992‐93
993‐94
994‐95
995‐96
996‐97
997‐98
998‐99
9‐2000
000‐01
001‐02
002‐03
003‐04
004‐05
005‐06
006‐07
007‐08
008‐09
1 1 1 1 1 1 1 1 1
199 2 2 2 2 2 2 2 2 2
25
Chart 12: Services Growth rate
10
12
6
8
4
6
0
2
1990
‐91
1991
‐92
1992
‐93
1993
‐94
1994
‐95
1995
‐96
1996
‐97
1997
‐98
1998
‐99
999‐2000
2000
‐01
2001
‐02
2002
‐03
2003
‐04
2004
‐05
2005
‐06
2006
‐07
2007
‐08
2008
‐09
19
26
Advanced Technology ProductsAdvanced Technology Products
• ATPs:– Pharmaceuticals (SITC‐Rev 2 code 541)– Office machines and automatic data processing equipment (code 75)equipment (code 75)
– Telecommunications equipment (code 764)– Aircraft/associated equipment (code 792)Aircraft/associated equipment (code 792)– Optical instruments & apparatus (code 871)– Measuring & checking instruments (code 874)
• ATP imports and trade deficits accelerated in early 2000s (except pharmaceuticals) (See Charts 13 to 17)
27
Chart 13: Computer/office equipment
4000
4500
5000
p / q p
2500
3000
3500
4000
1500
2000
2500
0
500
1000
Export $ million Import millionExport $ million Import million
28
Chart 14: Telecommunication equipment
8000
9000
10000
q p
6000
7000
8000
3000
4000
5000
0
1000
2000
0
Export $ million Import $ millionExport $ million Import $ million
29
Chart 15: Aircraft/associated equipment
12000
14000
Chart 15: Aircraft/associated equipment
8000
10000
4000
6000
0
2000
Export $ million Import $ millionExport $ million Import $ million
30
Chart 16: Optical Instruments
160 00
180.00
200.00
120.00
140.00
160.00
60 00
80.00
100.00
20.00
40.00
60.00
0.00
1978
1980
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Export $ million Import $ million
31
Chart 17: Measuring instruments
2500.00
3000.00
Chart 17: Measuring instruments
2000.00
2500.00
1000.00
1500.00
0.00
500.00
Export $ million Import $ millionExport $ million Import $ million
32
Industrial PolicyIndustrial Policy • Complete withdrawal of State from Industrial Policy in India particularly since 1991:Policy in India particularly since 1991:– Industrial policy instruments used in the past are no longer used (See Table on Industrial Policy Instruments)
f ll d l– Duty free imports, e.g., are allowed in many vital sectors (See Table on Tariff Structure)
• But strong State intervention in China:But strong State intervention in China:– Major developments in ATPs such as Telecommunications, Computers, pharmaceuticals (See Charts 18 to 20)(See Charts 18 to 20)
– Other ATPs such as aircraft, optical instruments etc are in the process of being developed (See Charts 21 to 23)23)
33
Table: Industrial Policy InstrumentsTable: Industrial Policy Instruments
• Import protection• Subsidies • Tax policy• Coordinating investments/Indicative plans/strategies• Coordinating investments/Indicative plans/strategies• Directed credit• Specialized R&D institutionsp• National R&D projects• Strategic FDI policies
P bli t f t i R&D• Public sector – manufacturing; R&D• Patent policies• Etc
34
Table: Tariff StructureTable: Tariff Structure
• Mostly 7.5% to 10% for manufactured goodsost y .5% to 0% o a u actu ed goods• BUT several exceptions and exemptions:
– Computers (code 8471) 0%p ( )– Telecommunications equipment (8571) 0% – 68 products in chapters 70,84,85 &90(e.g., optical instruments) 0%
– Mega power project, National HighwayD l t j t 0%Development project 0%
Source: Customs Tariff, 2009‐10 in the website of Central Board of Excise and Customs (www.cbec.gov.in); Krishnamurthy Committee Report, 2008 (www.nmcc.nic.in) for power and highway projects
35
Chart 18: China: Computer/office
200000 00
equipment
140000 00160000.00180000.00200000.00
80000.00100000.00120000.00140000.00
20000.0040000.0060000.00
0.00
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Export $ million Import million
36
Chart 19: China: Telecommunication
140000.00
equipment
100000.00
120000.00
60000.00
80000.00
0 00
20000.00
40000.00
0.00
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$ ll $ llExport $ million Import $ million
37
Chart 20: China: Pharmaceuticals
8000.00
9000.00
5000 00
6000.00
7000.00
3000.00
4000.00
5000.00
0 00
1000.00
2000.00
0.00
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$ ll $ llExport $ million Import $ million
38
Chart 21: China: Aircraft
10000.00
12000.00
Chart 21: China: Aircraft
8000.00
10000.00
4000.00
6000.00
0.00
2000.00
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Export $ million Import $ million
39
Chart 22: China: Optical instruments
50000 00
60000.00
Chart 22: China: Optical instruments
40000.00
50000.00
20000.00
30000.00
0.00
10000.00
0 00
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Export $ million Import $ millionExport $ million Import $ million
40
Chart 23: China: Measuring equipment
16000.00
18000.00
Chart 23: China: Measuring equipment
10000 00
12000.00
14000.00
6000.00
8000.00
10000.00
2000.00
4000.00
0.00
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Export $ million Import $ million
41
Industrial Policy ImportantIndustrial Policy Important
• Also to prevent damage to existing industries:p g g– Inverted duty structure ( duty on raw materials and components > that on finished goods) in India:
• Tyres auto‐components; several equipmentTyres, auto components; several equipment– Indirect taxes > import duty:
• India: 28%‐35%Chi 17%• China 17%
• Imports have gone up sharply in developed industries such as machinery sector , drug y , gintermediates motor vehicles parts See Charts 24 to 26)
Source: Krishnamurthy Committee Report, 2008 (www.nmcc.nic.in) 42
Chart 24: India’s Machinery Sector
60000.00
70000.00
40000.00
50000.00
20000.00
30000.00
0.00
10000.00
Export $ million Import $ millionExport $ million Import $ million
43
Chart 25: India’s Pharmaceuticals
6000
7000
Chart 25: India s Pharmaceuticals
4000
5000
2000
3000
0
1000
2000
0
$ ll $ llExport $ million Import $ million
44
Chart 26: India’s Motor vehicle parts25000
Chart 26: India s Motor vehicle parts
15000
20000
10000
0
5000
0
Exports $ million Imports $ millionExports $ million Imports $ million
45
ConclusionConclusion
• Unless steps are taken to prevent damage toUnless steps are taken to prevent damage to existing industries and to promote new ones, manufacturing trade deficit likely to worsen, putting severe strain on India’s BOP
• The claim of positive long term impact on BOP of abolition of Industrial Policy, as a part of Structural Reforms, is questionable.
• Industrial Policy is of vital importance in India today
46
