The two largest countries in the Asian sub continent Bharat and China are the emerging economies of the world and the countries to be watched in the next two decades. While China is the second largest economy in the world Bharat is slowly inching towards the fifth slot and likely to beat UK to become the fifth largest economy shortly. China’s GDP growth last year was 6.9% while Bharat clocked a reasonably impressive growth of 7.6%. However, one should remember that while China’s size of economy is around $ 11 trn , Bharat’s economy is only $ 2 trn . In 2014 Bharat’s total trade (ie., imports and exports) was 49.6% of its GDP while for China it was 41.5% of its GDP. While Bharat’s global trade is predominantly an import driven one, for China it is the other way around ( ie., export driven).
Sino Bhartiya Trade
In the recent past there were several messages in social media advocating for boycott of Chinese goods by Bharat though the Bhartiya government is official silent on this matter. Bharat’s trade deficit with China in 2015-16 was $ 52.68 bn higher than the year 2014-15 ( $ 48.48 bn). The bilateral trade between Bharat and China in 2015-16 was at $ 70.73 bn lower than the year 2014-15 ( $ 72.34 bn). Major Bhartiya imports from china are telecom instruments, computer hardware and peripherals, fertilizers, electronic components, organic chemicals, drug intermediates, consumer electronics, iron and steel etc. Bharat’s exports to China are mainly primary and intermediate products.
Bharat has signed a five year Development Programme for Economic and Trade Cooperation to chalk out a medium term road map for for promoting balanced and sustainable development of economic and trade relations between China and Bharat, on the principle of equality and mutual benefit. This is aimed at achieving a reasonably balanced bilateral trade between Bharat and China by the next five years. China’s total exports and imports in 2014 were to the tune of $ 2.37 trillion and $ 1.53 trillion respectively, leading to a trade surplus of $ 834 billion !!!. Therefore, Bharat’s bilateral trade with China is around 0.18% of China’s total volume of global trade and Bharat’s trade deficit with China is around 6.35% of China’s overall trade surplus. During 2015-16 Bharat’s total exports and imports were $ 261 bn and $ 380 bn respectively and the trade deficit was $ 119 bn.
Viewed from Bharat’s angle Bharat’s bilateral trade with China is around 11% of Bharat’s total volume of global trade and Bharat’s trade deficit with China is around 44.5% of Bharat’s overall trade deficit. This data indicates that reducing the Bharat’s trade deficit with China will have significant positive impact for Bharat but very little or insignificant negative impact for China.
China’s FDI in Bharat has increased since 2014 and has committed investments over $ 20 bn in the next 5 years. Financial Times reported that Bharat, with $ 63 billion of FDI announced in 2015, has taken the top rank in the list of countries in terms of greenfield capital investment and became the top preferred destination for global FDIs. The stark difference between Bharat and China in the global trade is that while Bharat has more imports than exports for China it is highly export driven foreign trade. The efforts of Bharat to push its exports have not taken off yet mainly because of two reasons- 1. Recession in the world economy and, 2. Bharat’s exports being mainly in primary and intermediate products rather than high end value added items.
The fact that Bharat has skipped the industrial sector and jumped from agriculture sector to services sector in its economic growth story is one primary reason for this weak link that has impacted its manufacturing sector. Bharat is striving to push its exports by being cost competitive but beyond a point this will have no relevance since global exports are mainly driven by high quality and value addition. In this context skill development of the people and innovation become differentiators in global trade. Skill development and innovation cannot be created over night and they have to be nurtured with a long drawn road map to become sustainable. While inflows of FDI and technology transfer can provide the much needed financial and technological capital, skill development of the people will take a longer period. Therefore, there is a need to have a comprehensive and integrated approach covering the FDI, foreign technology transfer and skill development to boost Bharat’s manufacturing as well as exports focusing on high end value added products.
While pursuing the above mentioned strategy on exports what Bharat needs to specially focus on is, to have a strategic shift towards import substitution. The efforts of Bharat in import substitution will yield better results in achieving a favorable balance of trade compared with its approach on exports growth. Bharat’s top three import components are crude oil, gold and capital goods. While capital goods imports are needed to boost Bharat’s manufacturing and in turn exports of high end value added products, with regard to crude oil and gold there is a need to have a strategic approach in the long term interests of the country.
|Bharat’s Import of crude oil||2014-15||2015-16|
|Quantity||189.4 million tones||202.1 million tones|
|Amount||USD. 112.7 billion||USD. 64.4 billion|
Bharat is the third biggest energy consuming country after China and USA with 5.3% global share in the year 2015. Bharat’s total primary energy consumption from crude oil (29.45%), natural gas (7.7%), coal (54.5%), nuclear energy (1.26%), hydro electricity (5.0%), wind power, biomass electricity and solar power is 595 Mtoe,i.e., metric tone of oil equivalent (excluding traditional biomass use) in the year 2013.
From fossil fuel to renewable energy
About 70% of Bharat’s electricity generation capacity is from fossil fuels. By 2030, Bharat’s dependence on energy imports is expected to exceed 53% of the country’s total energy consumption. According to a survey conducted in 2013 70% of Diesel, 99.6 % of Petrol consumed by Transport Sector alone in Bharat. Therefore, Bharat needs to have a well thought over strategy to go for solar power in transportation sector. No doubt this poses a challenge in reconfiguring the vehicles to make them compatible for solar power in lieu of diesel and petrol. Nevertheless it also throws up enormous opportunity to drastically prune down Bharat’s crude oil imports in addition to substantially reducing the levels of air pollution in the country caused by vehicles. USA and Germany are exploring the possibility of the concept of solar power roads by going for solar panels on the roads. Though this is an expensive affair, Bharat being a tropical country has better potential to generate solar power compared to USA and Germany and there is scope to make this concept a viable one provided Bharat goes for roof top solar panels on the roads which are cheaper than the solar power roads models being experimented by these countries abroad.
Bhartiya scientists at Gujarat Energy Research and Management Institute (GERMI) have suggested the construction of roof top solar panels on the roads particularly on national and state highways, which will be relatively less expensive and more durable than the direct solar power roads ventured abroad as mentioned above. These Bhartiya scientists estimated that a PV roof cover over the four-lane 205 km Ahmedabad-Rajkot highway can generate 104 MW of power while the Ahmedabad-Vadodara highway, 93 km long, can reap 61 MW of electricity. Therefore on a conservative basis the existing network of national highways that cover a distance of 96,271 KMs have the potential to generate 48,130 MW (48 GW) of solar power. The current major district roads and rural road network in Bharat covers a distance of 4,67,763 KMs and 26,50,000 KMs respectively. Therefore, Bharat’s rural road network has an immense potential to generate solar power that can meet not only the demand of the rural population but the semi urban and urban population as well.
Bharat currently imports solar panels from china, Taiwan and Malaysia and imports from China constitute 66% of our total solar panel imports. Bharat’s solar imports in 2014-15 were $. 821 million which rose three times to $. 2.34 billion in the year 2015-16 !!! By formulating an integrated long term policy Bharat can boost its domestic solar power production as well as substantially reduce the import of crude oil for its transport sector needs. This also offers scope for reduction of solar panel imports and manufacturing eco friendly solar power propelled vehicles that would be value additions as spin off benefits. This import substitution strategy of crude oil by domestic solar power will also lead to scaling up the domestic manufacture of solar panels resulting in significant cost reduction making solar panel imports unattractive.
Coming to the import of gold which is the second largest item of imports by Bharat, despite several measures in the past to dissuade the people from buying gold, the demand for gold continues to grow. It is estimated that Bharat has around 22,000 tonnes of gold in various forms held by the people privately and around 600 tonnes of gold is used in jewellery making every year as per the studies of World Gold Council. Bharat’s official gold holdings are 557.7 tonnes and Bharat ranks 11 th in the world on official gold holdings. Bharat is also the second largest buyer of gold (next to china)
Bharat’s gold imports
|Year||Volume (tones)||Value ($. Bn)|
Bhartiya government has launched three schemes for investments in gold. Gold coins and bullion scheme is useful for small investors. Sovereign gold bond scheme is meant for upper middle class people. These two schemes are useful for the people who want to buy gold (in future). Whereas, in order to tap the large quantity of existing gold lying with the people (estimated to be around 22,000 tonnes) the government has introduced gold monetization scheme. As this scheme covers raw gold (bars,coins, jewellery excluding stones and other metals) which will be melted and converted into bars, it is unlikely that majority of the people will opt for this scheme.
Therefore, there is a need to introduce a novel gold deposit scheme where the gold deposited by the people will be kept intact under a trust receipt without melting and giving them the option to withdraw the same on maturity as well as before maturity. The depository institution (govt/ banks) will also obtain authorization from the depositor of gold for mortgaging the gold to raise finance through a derivative instrument. This gold so deposited can be used as a security by floating a derivative gold bond to raise money by the government/ banks. Such a derivative gold bond fully backed by gold as underlying transaction can be more effective instrument in monetizing the gold and generating huge funds into the economy. This will reduce the burden of the banks in Bharat which are currently under the stress of mounting non- performing assets and encourage them to lend for bankable projects. Through this mechanism of derivative gold bonds funds can be raised within Bharat as well as abroad for longer tenor and the funds so raised can be earmarked for financing mega projects of national importance. There is good potential to convert the gold lying idle in banks’ lockers into this derivative gold bond by through a safe custody mechanism backed by the trust receipt mentioned earlier.
Bharat needs to have a comprehensive and integrated approach covering the FDI, foreign technology transfer and skill development to boost its manufacturing as well as exports focusing on high end value added products. Bharat also needs to have a strategic shift towards import substitution. Bharat’s top three import components are crude oil, gold and capital goods. While capital goods imports are needed to boost Bharat’s manufacturing and in turn exports of high end value added products, with regard to crude oil and gold the author recommends the following suggestions- reduction of crude oil imports by stepping up the solar power production as a substitute to crude oil and monetizing the gold by floating a derivative gold bond to infuse long term funds into the economy and earmark the same to fund long term projects of national importance.
(Ex Senior Banker, Management and Financial Consultant, Visiting faculty at premier B Schools and Universities. E [email protected])
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