The changing face of India’s foreign trade

The last 5 years data for International Trade, depicts a clear trend. India’s key trade partners are changing rapidly. First of all, the volume of international trade has expanded rapidly from $95 billion in 2001-02 to $252 billion in 2005-06. This is a remarkable growth (21.5% CAGR) and is one of the key drivers of economic growth. International trade in value terms is still about 1/3 of the GDP, so there is considerable room for continued expansion of International trade.

A look at some of the leading trade partners during this period shows the remarkable growth in trade with China. China, from nowhere, is now the second most important trade partner for India (figures in $ millions).

It looks likely that in another 5 years China will be as important as The US for India as a trading partner. The diagram below shows the increase in trade with some of the leading partners.

Clearly China, Korea, Singapore are integrating much faster with India, than the erstwhile mainstays – USA, Japan and UK. The USA, is of course such a large partner, and the base effect in its case was higher. However, the trends clearly show an increased Eastward focus. This is even more apparent when one starts looking at the figures for other ASEAN countries.

The BRIC forecast

The Hindu has an interesting view on the The Goldman Sachs report on Brazil, Russia, India and China (BRIC).

“The co-author of the BRIC report, while presenting the same here, raised concerns over the levels of secondary education in India. This is an important variable in the model and in comparison to others in the report, it is an area where India stands weak”, the article states.

The article further says, “On applying the model to various economies as they stood in 1960 and comparing the current levels of these economies as against what the model would have projected, none of the Asian economies have shown parity. The actual GDPs are higher than that projected in Hong Kong and Korea and much lower in countries such as India.”

It is important to note that if India doesn’t get its act together fast, it may well under perform the expectations again. The crux of the matter lies with how the rural sector is addressed. Rural India still accounts for over 70% of the population. The real boost to the rural sector can come only through massive investment in rural infrastructure and enabling the rural population to participate in the gains of a modern economy. This will involve massive spending on rural irrigation, roads, rural education and rural marketing. These are not very glamorous areas and are not considered news worthy (or vote worthy). However, this is where the real multiplier will come from. It will create a new class of consumers for the industrial sector.

This is but one of the areas to address. There is actually no room for complacency. The old foe Murphy, is worth quoting:

• Anything that can go wrong will go wrong.
• If there is a possibility of several things going wrong, the one that will cause the most damage will be the one to go wrong. Corollary: If there is a worse time for something to go wrong, it will happen then.
• If anything simply cannot go wrong, it will anyway.
• If you perceive that there are four possible ways in which a procedure can go wrong, and circumvent these, then a fifth way, unprepared for, will promptly develop.
• Left to themselves, things tend to go from bad to worse.
• If everything seems to be going well, you have obviously overlooked something.
• It is impossible to make anything foolproof because fools are so ingenious.
• Whenever you set out to do something, something else must be done first.
• Every solution breeds new problems

Rising Inequality - The stealth Bomber

Paul Krugman made an interesting observation about the reduced egalitarianism in the American society. This is how he sees it:
“To get a sense of just how dramatic that shift has been, imagine a line of 1,000 people who represent the entire population of America. They are standing in ascending order of income, with the poorest person on the left and the richest person on the right. And their height is proportional to their income -- the richer they are, the taller they are.
Start with 1973. If you assume that a height of six feet represents the average income in that year, the person on the far left side of the line -- representing those Americans living in extreme poverty -- is only sixteen inches tall. By the time you get to the guy at the extreme right, he towers over the line at more than 113 feet.
Now take 2005. The average height has grown from six feet to eight feet, reflecting the modest growth in average incomes over the past generation. And the poorest people on the left side of the line have grown at about the same rate as those near the middle -- the gap between the middle class and the poor, in other words, hasn't changed. But people to the right must have been taking some kind of extreme steroids: The guy at the end of the line is now 560 feet tall, almost five times taller than his 1973 counterpart.”
He goes on to explode a few myths (as he calls them), namely:
“MYTH #1: INEQUALITY IS MAINLY A PROBLEM OF POVERTY.
It's not only the poor who have fallen behind -- the normal-size people in the middle of the line haven't grown much, either. The real divergence in fortunes is between the great majority of Americans and a very small, extremely wealthy minority at the far right of the line.
MYTH #2: INEQUALITY IS MAINLY A PROBLEM OF EDUCATION
The richest twenty percent are those standing between 800 and 1,000. But even those standing between 800 and 950 -- Americans who earn between $80,000 and $120,000 a year -- have done only slightly better than everyone to their left. Almost all of the gains over the past thirty years have gone to the fifty people at the very end of the line. Being highly educated won't make you into a winner in today's U.S. economy. At best, it makes you somewhat less of a loser.
MYTH #3: INEQUALITY DOESN'T REALLY MATTER.
It's easier for a poor child to make it into the upper-middle class in just about every other advanced country -- including famously class-conscious Britain -- than it is in the United States. Not only can few Americans hope to join the ranks of the rich, no matter how well educated or hardworking they may be -- their opportunities to do so are actually shrinking. As best we can tell, pretax incomes are now as unequally distributed as they were in the 1920s -- wiping out virtually all of the gains made by the middle class during the Great Compression.”

India would do well to take note of this and try and address the issues so that such an event does not occur here. If it does the results will be catastrophic. Inequalities are visible and will be manifested in rising crime rates. If unchecked, it will further lead to anarchy and breakdown. The price is way too high for comfort.

The rising inequality is like a stealth bomber. It creeps up unnoticed and then creates catastrophe.