People's Democracy

ACCORDING to official spokesmen, the evidence on trends in imports into India indicate that fears that import liberalisation would result in an import surge were misplaced. Rather, in their view, Indian producers have clearly been able to hold their own against international competition. The evidence

does indeed point to some sluggishness in the growth of the dollar value of India’s non-oil imports in recent years. While India’s total import bill in dollar terms rose consistently through the 1990s starting from its 1991-92 low, the rate of growth has definitely decelerated since 1996-97. Further, the

deceleration after 1995-96 is much more pronounced in the case of non-oil imports which are the commodities in which an import surge, if any, was expected in the wake of liberalisation.

There is of course one good reason to expect a deceleration in import growth after 1995-96, and this is the deceleration in production and investment in the industrial sector. The evidence does suggest that after a mini-boom in the industrial sector starting with the recovery in 1993-94, industrial growth slipped in the years since 1996-97. From a peak of 13.0 per cent in 1995-96, the rate of industrial growth fell to 4.1 per cent in 1998-99, recovered to 6.7 per cent and fell again to 4.9 per cent in 2000-01. And it is also true that the three years 1993-94 to 1995-96 were years of high import growth, while the years after that witnessed a deceleration in import growth. Thus, output movements in the principal sector dependent on imports for capital equipment, intermediates and components, i.e. industry, appear to substantially explain movements in India’s import bill as well.

This argument, while of considerable merit, tells only part of the story. Aggregate figures suggest that the import intensity of domestic production, which did indeed rise during the first half of the 1990s, has remained more or less constant since then. India’s import to GDP ratio, which rose sharply from 8.1 per cent in 1991-92 to 11.5 per cent in 1995-96, has in fact marginally declined between then and 1998-99. Evidence of a rise in the first two quarters of 1999-2000 has been followed by that of a fall in the third quarter, which is the last for which GDP figures are available. The fact that import intensity has declined indicates that the growth slowdown, while it would have dampened import inflows, was in itself only part of the explanation for the trend in imports after 1995-96.

It is, of course, true that the trends in aggregate imports provide an unsatisfactory picture of the impact of liberalisation on imports, since they include imports of oil and oil products. Trade in petroleum, oil and lubricants is less affected by liberalisation and more by movements in domestic demand, and the value of such trade is susceptible to unexpected changes because of the volatility that oil prices have tended to display.

However, even if we exclude oil imports, the trend in import intensity of domestic production is not alarming, though at variance with the aggregate figure. The ratio of non-oil imports to GDP, which rose from 5.9 per cent in 1991-92 to 9.1 per cent in 1995-96, fell to 8.3 per cent in 1996-97 and then rose to 8.9 and 9.4 per cent respectively in 1997-98 and 1998-99. However, its 1998-99 value (9.4 per cent) was only slightly above its 1995-96 value. This tendency for the import-GDP ratio to stay below a peak reached in the mid-1990s, when combined with the slow down in growth, explains the sluggishness in the aggregate import bill, making the slowdown itself only a partial explanatory factor.

What, is more, if we consider individual sectors most affected by import liberalisation, such as for example capital goods, and examine the ratio of imports to domestic production in the registered manufacturing sector, the scenario till the date for which output figures are available from the Annual

Survey of Industries tallies with the trend described earlier. The ratio of imports of capital goods to domestic production in the registered manufacturing sector, which rose sharply from 12.3 per cent in 1993-94 to 14 per cent in 1995-96, fell to 11.9 per cent in 1997-98. Even though this figure rose to 12.9 per cent in 1998-99, the last year for which figures can be calculated, this figure remains well below its 1995-96 peak.

In sum, all the evidence seems to point in one direction. Till 1995-96 imports responded as expected, rising sharply in the wake of import liberalisation. This was a period when the import intensity of domestic production was on the rise. However, matters changed subsequently. To start with, a slowdown in growth dampened the rate of growth of imports. But more crucially, the import intensity of domestic production stayed below its mid-1990s peak. As a result, import growth appeared far less than warranted by even the observed slow growth in output.

It is this evidence that provides support to the view that liberalisation has not accelerated the flow of imports into India with adverse consequences for domestic production. Is this indicative of the fact that, after a period of being displaced, if not savaged, by imports, Indian producers had restructured

themselves to face the onslaught from imported commodities?

That would have been the conclusion to arrive at but for evidence that besides the deceleration in industrial growth after 1995-96, there was one other tendency of significance that was operative. This was a sharp fall in the unit value of imports into India. This emerges from an anlaysis of the quantum and unit value indices (Base 1978-79 = 100) of India’s imports for 13 quarters, starting from the first quarter (April-June) of financial year 1996-97 and ending with the first quarter of 1999-00, which is the last for which data is currently available. The figures show that the unit value index or weighted average unit price of India’s imports rose during 1996-97, reached a peak of 513 in the first quarter of 1997-98 and has since then been on the decline. Over the subsequent two years the unit value index fell by 33

per cent. On the other hand, the quantum index of imports, or the volume of imports, more than doubled over the period April-June 1996-97 and April-June 1999-2000, and rose by 57 per cent over the two-year period starting April-June 1997-98. Given these contrary movements in the quantum and unit value indices of imports, it is to be expected that the value of imports into India would only partially reflect the real inflow of commodities from abroad. That is, the trend in the value of imports would not reflect in full the competition faced by and the displacement of domestic producers in the home market. Stated otherwise, sluggishness in import "value" growth does not reveal enough of the trend in real imports and therefore on the ability of domestic producers to face up to import competition.

There are three issues that need to be dealt with here. First, have volatile oil prices been the principal determinant of the movements in the unit value index? We do know that oil prices crashed during in 1997-98, taking the per-barrel price of oil to an unprecedented low of 10 dollars. This would indeed have influenced the average unit values of India’s imports. In fact, the decline in the unit value index was the sharpest in 1997-98, with the figure falling by 28 per cent in the course of that year alone. But it is also true that oil prices rose sharply subsequently, largely as a result of production cutbacks ensured by OPEC. As a result, oil prices tripled during the year starting late 1998, rising from a debilitating low of 10 dollars a barrel to close to well above 35 dollars a barrel. Yet there was no equal compensating movement in the unit value of India’s imports, which rose by just 10 per cent in the year ending April-June 1999-2000. Other import prices must have been moving downwards to ensure this trend, a matter to which we return later.

The second is that the movement in the prices of India’s imports does not appear to be the result of a general trend in world prices. In fact between July-September 1997 and January-March 1999, when oil prices were falling and then subsequently rising, the terms of trade, or the ratio of export to import prices, facing India improved sharply at first, worsened slightly subsequently and then improved again. That is, while India gained from the oil price fall, it was not as adversely affected by the subsequent rise in oil prices because of the rise in the value of its own exports and the fall in the unit value index of its imports. This would have had a positive effect on India’s balance of trade.

Third, the evidence does indicate that in real terms the flow of imports was stronger then the flow of exports after the mid-1990s. This comes through from figures on "gross terms of trade" or the ratio of the overall quantum index of imports and the overall quantum index of exports. This ratio rose sharply after January-March 1998, when it stood at 115, to touch 831 a year later and remain at 641 in the quarter April-June 2000.

In sum, during the period when imports appear to have slowed in value terms to an extent greater than warranted by the deceleration in growth in the commodity producing sectors, the volume of imports into India does seem to have risen. But the impact of this on the aggregate value of imports appears to have been neutralised by a sharp fall in the unit value index of imports into India. In fact, such a fall occurred across a range of commodities. During the period April-June 1996 and April-June 1999, the decline in unit value has been particularly sharp in Food and food articles, Beverages and tobacco, Animal and Vegetable oils and Machinery and transport equipment.

In the case of the last of these the decline in unit values has been operative for a much longer time, excepting for a brief recovery during the quarter July-September 1998. The unit value index of food and food articles declined by 49 per cent during the year ending January-March 1999, that for Machinery and transport equipment by 46 per cent between July-September 1997 and April-June 1999, and that for Beverages and tobacco by 61 per

cent and for Animal and Vegetable oils by 30 per cent over the year ending April-June 1999. In all these cases, the period of unit vale decline was also one characterised by a surge in the quantum index of imports.

The question that remains to be answered relates to the factors underlying the recent decline in the unit value index of imports of a number of commodities. There are two obvious reasons why the decline occurred. First, in the case of a number of primary commodities, the period under question was one in which international prices were collapsing. In a range of areas stretching from edible oils to wheat, the observed effects on imports into India of the collapse in world prices forced the government to adjust tariffs upwards to stall the inflow of imports. Even with those higher tariffs, domestic prices of a range of primary products varying from coconuts and coconut oil to rubber have during different time periods slumped in order to face the actual and perceived competition from imports.

Second, in the case of manufactured commodities, the deceleration of demand in the domestic market must have triggered price cuts by international producers trying to retain the foothold they had gained in Indian markets during the first half of the 1990s. This must be particularly true of international sellers of capital goods in Indian markets. In the case of a number of manufactured consumer goods, we must recall that quantitative restrictions have been removed quite recently. Imports here consisted largely of the imports of the capital goods, raw materials, intermediates and components that were being sourced from abroad by transnational producers who had displaced Indian brands based on manufacturing facilities established in India. It is now widely accepted that these producers, driven by misconceptions about the large middle-income market in India, had created capacities that were far in excess of that warranted. When demand for many consumer goods slowed in the wake of the exhaustion of the pent-up demand for branded, imported or import intensive goods, these producers

found themselves engaged in a price war in many markets.

Price cuts if resorted to in a situation of constant or rising costs would tell heavily on the bottom lines of firms, which can ill afford it given their exposure to stock markets in the country. A collapse in share prices in the wake of a fall in reported earnings would not merely trigger a take-over bid, it could also adversely affected the brand image of the firm’s products. Since the costs incurred by these firms include the costs of imported inputs, it is possible that the transfer prices on imports of raw materials, intermediates and components sourced from the parent or a third country subsidiary were reduced to facilitate the drive to retain and increase market shares in a sluggish market. Import quantities would in this manner have been maintained and increased, even while import unit values declined. This may

be good for the Indian as consumer, but not so for Indian producers or for those employed by them.

Displacement was definitely a possibility as suggested by the growing absence of Indian brands in India’s malls.

Needless to say, more evidence and more research is needed to establish this case in all its detail. But it is one that the available evidence does point to. If so, the prognosis is indeed disconcerting. The quantity drive by international firms, at the expense of price, occurred in a context where even though

demand in India was decelerating, international markets were still buoyant because of robust growth in the US. That scenario has changed since the last quarter of calendar year 2000. International producers are now burdened with excess capacities the world over, resulting in periodic reports of

layoffs and closures in leading international firms. If so the importance of the Indian market is all the greater for them, creating a situation where the quantity drive would only intensify. A prolonged period of sagging import prices and rising import quanta cannot be ruled out. This calls for greater caution on the part of the government and a willingness to use tariffs, anti-dumping measures and the like to dampen a likely import surge. Deriving comfort from the size of India’s import bill, without examining the obvious conflict between import value trends and the actual experience of domestic producers could prove disastrous from the point of view of domestic production and employment.