[op-ed snap] Decoding the imports surge post demonetisation


Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Generally, detailed data of exports and imports is not important, only the reason behind the rise and fall of export and import is important. The article discusses that reason.


Rising Imports

  1. Indian imports rose by 23.40% year-on-year (y-o-y) for the first eight months of the calendar year 2017
  2. Whereas, imports contracted by 6.80% between April-December 2016
  3. Reason: Many experts says 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
  4. 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 claim reasonable?(discussed in ‘Reason’ above)

  1. According to the writer, the claim is not correct
  2. 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
  3. 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
  4. But even more importantly, these three sectors explain 81.30% of the rise in imports during January-August 2017
  5. Hence, the aggregate import number is heavily skewed because of these sectors and masks the trade performance of most other sectors
    (See Chart Below)

Gist of the above analysis

  1. If one goes beyond these top sectors, imports growth is much more muted
  2. 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
  3. Hence a 23% surge in imports bill during January-August 2017 is not the result of rising imports across the commodity spectrum

Issue of nominal and real import bill

  1. The second aspect of the imports bill is that it is a nominal imports bill, not the real bill
  2. Nominal imports equal the quantity imported times the import price

Is import growth concentrated in informal sector?

  1. A significant amount of the production process of iron and steel and other metals happens within the informal sector where workers are typically paid cash wages
  2. Hence some of the important commodities produced within the informal sectors did not experience a surge in imports but, in fact, showed good export performance
  3. The same holds true for ash, ores and slag, where growth is 130%, and for vegetable oils which are, in fact, produced within an even more informal industry than iron and steel
  4. The conclusion holds even after extending the analysis beyond larger sectors; imports growth is not concentrated in informal sectors

Gist of the above discussion

  1. Overall, we did not observe the evidence that imports rose because of broken domestic supply chains
  2. What our analysis claims is that the import surge is sort of disconnected from the fact that demonetisation might have broken supply chains to some extent

Then what explains the rising imports?

  1. The exchange rate has appreciated from around Rs68 in January to Rs63.50 against the US dollar in August 2017
  2. Around 85% of India’s imports are invoiced in dollars and hence, at least in the short run, the rupee/dollar rate is more significant a determinant of imports than bilateral exchange rates
  3. Given the sharp appreciation till August, at least part of the rise in imports is surely explained by the exchange rate movement