Indian imports rose by 23.40% year-on-year (y-o-y) for the first eight months of the calendar year 2017, after contracting by 6.80% between April-December 2016. Many economists believe that the sharp reversal in imports could be attributed to broken domestic supply chains, as a consequence of the demonetisation exercise that was conducted in November 2016. Experts also point to low industrial production numbers, which they claim suggest that rising imports are substituting domestic production rather than satisfying increased domestic demand. Is this causal inference correct? We believe that it is not, and we present compelling evidence in this article to support our view.
Even before getting into what leads to an imports surge, it is instructive to analyse the nature of India’s import bill and the drivers of imports growth. For January-August 2017, the three sectors, namely, mineral products, stone and glass, and electrical/machinery (out of 15 according to the Harmonized Classification System), accounted for 64.83% of the import bill. Some of the important commodities within these sectors include petroleum, liquefied natural gas, diamonds, gold and mechanical equipment. But even more importantly, these three sectors explain 81.30% of the rise in imports during January-August 2017 (see chart). Mineral products account for 27% of the growth in imports while the stone and glass sector (which includes jewellery) accounts for a whopping 42%. Hence, the aggregate import number is heavily skewed because of these sectors and masks the trade performance of most other sectors. If one goes beyond these top sectors, imports growth is much more muted. While the total imports bill for the top three sectors grew by 34% y-o-y, it only grew by 7% y-o-y for the other sectors. Hence a 23% surge in imports bill during January-August 2017 is not the result of rising imports across the commodity spectrum. Read More…
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