Assocham warns India may face payment crisis unless gov curbs deficit

India’s trade deficit could be in excess of $180 billion this year and could rise to an alarming $428.3 billion by 2015-16, creating a payments crisis, industry body ASSOCHAM said today.

India had a target of keeping its goods-trade deficit in the $120-130 range this year, but has failed miserably to stick to the estimates, partly due to the rise in oil prices. India buys about $120 billion of oil per year, at current rates.

Assocham warned that import of goods would cost as much as $858.6 billion in four years, as oil imports jump to $243.7 billion. Gold bill go from from $33.9 billion to $83.3 billion.

“There is need to curtail oil imports, or else there will be a severe burden on external payments position,” the body warned.

India has already gone through a severe ‘external payments crisis’ in 1991 — in which the country runs out of foreign exchange (like dollar bills) to pay for even the most essential commodities like medicines, machinery and oil.

The country is forced to ask for loans from foreign countries and banks to meet the shortfall.

One of the biggest problems with India’s foreign trade has been that the country depends on others like China for manufactured goods — everything from plastic toys and lights to TVs and machines.

The import dependency prevents the emergence of local manufacturers, which in turn prolongs the dependency — setting in motion a vicious cycle, such as that facing the United States.

“While the share of manufactured goods in exports of China, Japan and Germany is very high, India’s share has declined from 44.1 per cent in 2000-01 to 37.5 per cent in 2010-11,” the trade body added.

However, if capacity building of the industry takes place and competitiveness of Indian exports improves, then merchandise exports can stand at 549 billion dollars in 2015-16 and the trade deficit will be 309.6 billion dollars, it predicted.

The commerce ministry, aware of the situation, is strongly pushing for the setting up of ‘national manufacturing zones’ to simplify the hundreds of clearances, inspections and approvals required to set up and run manufacturing units in India.

However, it is facing opposition from various other ministries, such as those of labor and environment.

Some believe that allowing international trading chains like Wal-Mart and Metro into the country will help Indian manufacturers come up to the world standard. Many international chains, such as Wal-Mart, source a large part of their merchandise directly from manufacturers in China and sell it all over the world.

“It is critical to enhance manufacturing capabilities along with improvement in technological content of products which should translate into sharpening the export competitiveness and gaining a price advantage. Promotion of international trading houses will help develop strong international linkages,” Assocham said.

India’s export growth is likely to miss target this year. The study said growing uncertainties in the Eurozone, slowdown in advanced economies and weakening of the domestic had adversely impacted India’s external sector outlook.

Adverse global conditions and protectionist attitude being adopted by various western countries may lead to further drop in service exports, further decreasing the invisibles contribution to current accoun, it added.

India is currently meeting its shortfall in exports by diverting money that foreign investors bring in, to pay for the imports. In other words, it is using ‘capital inflows’ to fullfill its revenue deficit. When the time comes for foreign capital to go back and withdraw their money, India will face a crisis, Assocham said.

Foreign investors often pull back their investments if they see trade deficit rising out of control, fearing that the country may run out of foreign exhange and they will not be able to withdraw their money by selling their investments in the country. The fear leads to a condition similar to a run on a bank, ending in bankrupting entire countries.

ASSOCHAM pointed out that the amount of money foreign investors and other capital investors hold in the form of assets in India has risen almost seven times from 8.5 billion dollars in 2000-01 to over 57.3 billion dollars in 2010-11.

“In times of global uncertainty, it is very much likely that foreign investors pull out their money from India and take it back to their home countries,” it warned.

Others have warned that government moves — such as a recent one to tax overseas transactions in India in the past by creating a ‘retrospective’ law — may also worsen the situation.

“Poor regulations, inefficient processes and inconsistency of policies may also deter potential foreign direct investments,” it said.