Source: The post is based on the article “Non-essential curbs – Policy focus must shift from imports to exports” published in the Business Standard on 17th March 2023.

Syllabus: GS – 3: Effects of liberalization on the economy.

Relevance: About curbing imports in India.

News: The expanding trade deficit has prompted the government to curb imports.

About India’s trade deficit

Merchandise exports: The global economic slowdown has impacted India’s merchandise exports. The exports contracted 8.8% in February compared to the same period last year. Merchandise imports also contracted by 8.2% in February. The merchandise trade deficit also increased.

Service exports: However, sustained growth in services exports has helped narrow the overall (merchandise and services) trade deficit.

Current account deficit (CAD): According to experts, the current account deficit will remain around 2.5% of the gross domestic product this fiscal year. This will pose challenges in financing.

Overall balance of payments: The flow of foreign direct investment has slowed. Foreign portfolio investors are also continually selling their stakes.

About government policy on curbing imports

The government has been working on reducing imports for several years and has raised tariffs along with other barriers. The government would now be issuing fresh quality-control orders to curb imports.

The government is also working on strategies to contain “non-essential imports”. The idea broadly is import substitution.

Why government’s plan of curbing imports is wrong?

Curbs do not provide immediate macroeconomic stability: India has sufficient foreign-exchange reserves. This will help to overcome near-term challenges and maintain stability on the external front.

Previous efforts have not yielded enough results: All efforts so far have not led to any meaningful decline in imports. For instance, India has tried such measures for decades before liberalization.

Issues with classifications in a market economy: It is hard to determine non-essential imports in a functioning market economy. This will only lead to higher costs and affect the overall competitiveness of the economy. Further, the approach also opens the scope for lobbying.

Import does not mean it is bad: It is normal for a market economy to import goods and services in areas where it has domestic capabilities. For example, corporations are importing services from Indian firms not necessarily because of a lack of capability. They are doing so because the outcome is more efficient.

What should be done to improve macroeconomic stability instead of curbing imports?

Instead of focusing on imports, Indian policymakers have to spend more time and energy on exports. This is because sustained export growth will address the current account deficit and also increase private investments and job creation. Thus, leading to higher sustainable economic growth.