IASbaba’s Daily Current Affairs – 14th March 2017

Archives

ECONOMY

TOPIC: General Studies 3

• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
• Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Trade Deficit and Trump Era

Introduction

With US elections and the post BREXIT phase the world is seeing an anti globalization phenomenon. Trade dependant countries like India and China are concerned about the protectionist voices in the west becoming strong.

Issue:

It is not just Indian software firms that are likely to be affected after Donald Trump’s election victory in USA.

• Exporters of agri-commodities, textiles and apparel are soon likely to be in the same situation.
• One of the first policy steps that the Trump regime plans to take to “make America great”, is to home in on the trading nations with whom the US runs a big trade deficit, and force them to shrink it.
• It has released a new Trade Policy Agenda 2017 to identify and crack down on such trade partners.

While China (US runs a trade deficit of $300 billion with it), Germany ($68 billion) and Mexico ($62 billion) are high on the hit-list, India figures on it too given that the US runs a trade deficit of $30 billion with it.

What is it?

Trade deficit is the excess of a country’s import bill over its export receipts.

• To illustrate, the US trade deficit of $502 billion in 2016 means that the country spent $502 billion more on importing goods and services from other countries last year, than it earned by shipping stuff out.
• While some nations have an insatiable appetite for foreign goods, others are the opposite.
• They sit on a healthy trade surplus by churning out products and services that other nations need like China.

India’s case:

• India runs a trade deficit, with its import bill on crude oil, precious metals, electronic goods and other items, far exceeding its export earnings.
• In April to December 2016, India’s trade deficit was $76 billion.
• Just like the US, India too is keen to shrink its trade deficit, especially the yawning one with China.

Why is it important?

Running a persistent trade deficit has three key adverse effects on the economy.

• One, the country’s demand for dollars (foreign exchange) is usually greater than the supply. This leads to a steadily weakening home currency.
• Two, a high trade deficit also forces a country to constantly look to foreign investors to make up the gap between its export earnings and its import payouts.
• Three, in a slow-growing world, a rising trade deficit could be an indication that domestically produced goods are unable to compete against imports.
  • If local factories shut down, that leads to job losses.
  • It is the last factor that has the Trump camp worried.
  • The dollar has been none the worse for US’ sustained deficits.
• The US is hoping that by imposing high import tariffs on trade partners who run a large deficit with it, it can coax global manufacturing giants to relocate their factories back to its shores.
• By leaning on countries such as China and India to dismantle their import barriers, it can also access new markets for American goods and services.

How does it affect India and Indians?

What the US does about its trade deficit with India matters a lot to both its exporting and importing sectors and the people who are employed in them.

• The controversy over issuing H1B visas.
  • That’s not good news either for India’s young population looking for jobs, or for its policymakers looking to reap its much-touted demographic dividends.
• Export oriented sectors such as IT, agriculture and textiles are top job creators in the country.
• Given that the US is one of the few countries with which India runs a trade surplus, a reversal of this trade balance can spell trouble for the exchange rate.

Conclusion:

India has embarked on a campaign of Make in India and is looking to improve manufacturing base and increase infrastructure in the homeland. This seen along with actions of US government and the protectionist actions of west seem contradictory. The need is to use multilateral platforms effectively to arrive at a common cause.

Connecting the dots:

• Trade is a vital necessity of the country especially with a developing base. Critically analyse the need to counter protectionist forces and bridging trade deficits either ways to have balanced trade relations.

ECONOMY

TOPIC: General Studies 3

• Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.
• Awareness in the fields of IT, Space, Computers, robotics, nano-technology, bio-technology and issues relating to intellectual property rights.

Rising hardware imports and falling software revenue

• One of the most remarked feature of India’s growth is the premature diversification of aggregate production in favour of services at a relatively low level of per capita income.
• India’s large share of service sector in economy is presented as evidence of India’s pursuit of an alternative development strategy in sync with contemporary times where services dominate the economy. The reason is India’s indisputable success as a software services exporter.
• The service sector accounts for more than half of the country’s GDP and around 60% of the increment in GDP. However, the small share of manufacturing and large share of services is a cause of concern.
• Despite the objective of becoming self-reliant in small and micro-computers set by the Homi Bhabha Committee in 1963, India’s performance as a hardware producer has been dismal.
• As a result, there has been lopsided growth in software accompanied by stagnation in hardware in ICT.

Lopsided development

• A study by Central Statistical Organisation in 2010 found that
  • Share of the ICT sector (including IT-enabled Services or ITeS) in GDP had risen from 3.4 to 5.9% between 2000-01 and 2007-08 (India’s high growth years).
  • But the share of ICT services in ICT GDP had risen from an already high5% to 94.2% during those years.
• Thus, the one sided focus on ICT services has continued which was recently backed by more recent data from a special tabulation done by IHS Global Insight for the National Science Foundation of the US.
• Thus, value added (or revenues minus non-labour input costs) in India’s Computer programming and related services industry (which excludes ITeS) rose from USD 2974 million in 2000 to USD 19568 million in 2014.
• But value added in the sector producing computers and office machinery after rising from USD209 million in 2000 to USD775 million in 2011, fell to USD281 million by 2014.
• The overall picture showed stagnation in hardware industry and minor growth in ICT service industry.
• Unfortunately, the stagnation in domestic hardware production has occurred in a period when computer use has been rising rapidly in India. Even the government has been pushing for computerisation—in its own departments, in the banking sector, and among the public at large.

Technological Demands

• From WTO data it is known that the consequence of the combination of stagnation in production and expansion in use has seen a significant increase in the imports of computer hardware.
• This is visible in the following trend — imports of Electronic data processing and office equipment rose from USD 1413 million in 2000 to USD 4481 million in 2008. Then it saw a marginal fall in 2009 due to global economic crisis. But it resumed its climb to reach USD 8293 million in 2015.
• Thus, this rise in import is bound to continue and even gather pace.

Assessing India’s software service growth

• Exports of computer services have risen from USD 15,915 million in 2005 to USD 35,037 million in 2008 and further to USD 55,360 million.
• But the pace of growth has reduced sharply in recent years.
• As per RBI, the rate of growth of the combined exports of software and IT-enabled services has fallen from 20.8% in 2012-13 to 14.9% in 2014-15 and to a low of 7.3% in 2015-16.
• Even the WTO data suggests that the ability of the IT sector to earn the foreign exchange needed to finance imports of IT hardware has been shrinking.
• This is because the ratio of computer hardware imports to exports of computer services, which was falling prior to the 2008 financial crisis, has since shown signs of rising.
• The problem– the failure to develop a domestic hardware base is not restricted to computers alone but is characteristic of the information and communications technology (ICT) sector as a whole.
• ICT is an increasingly the sector of relevance given the rapid spread of mobile telephony and the substitution of communication devices for many operations earlier conducted with computers.
• Overall imports of ICT hardware into India have soared, especially after the boom in mobile communications. On the other hand, overall ICT exports are still constituted largely of and been driven by IT- and IT-enabled services.

Conclusion

• Thus, once the attention on ICT sector as a whole is shifted to, it will be realised that the shortfall in software export earnings relative to expenditure on hardware imports is not an imminent danger, but a current threat. Dollar earnings on ICT services exports are well short of expenditure on ICT hardware imports over the last decade.
• In 2012, India was among the top 10 countries in the world in terms of personal computer use, with an installed base of 57 million PCs.
• As per International Telecommunications Union, the percentage of households in India with a computer rose from 6% to 13% just between 2010 and 2014.
• This rapid expansion combined with the large size of the population that is still digitally excluded points to the possibility of an explosion in hardware use.
• Thus, the dismal performance of hardware sector needs to be resolved at the earliest as India’s foreign exchange expenditure on importing computer hardware is rising sharply whereas earning from Software and ITeS exports is slowing.
• Though the performance of the ICT sector is by no means evidence that services growth can substitute for manufacturing growth, but lopsided growth even in this small segment can have extremely adverse balance of payments implications.

Connecting the dots:

• The growth engine of India’s service sector has been the software industry. But this industry is slowing down owing to external circumstances. Critically examine India’s options to revive its software industry and ICT industry as whole.

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