By: Dharmakirti Joshi and Neha Duggar Saraf
India’s mining output has fallen by 3.5 per cent over the last two years, making the sector among the worst hit by policy impasse. Of the 218 coal blocks allocated since 1993, only 46 are producing coal or close to doing so, while the rest are dogged by clearance and land acquisition issues. As for iron ore, companies are still struggling to resume production after some states banned it in 2012 to curb illegal mining. Last month, Jharkhand ordered the closure of a majority of iron-ore mines operating under “deemed renewal” status after their leases expired. And the recent Supreme Court order deallocating all but four coal blocks allotted since 1993 created downside risks to mining output.
The upshot is that mining-sector woes have not only slowed GDP growth, but also contributed to India’s current account deficit (CAD) — even more than the popularly blamed gold imports.
Domestic fuel supply shortages have meant power and steel producers have had to rely exceedingly on imports in the last three years. Consequently, coal and metal scrap imports have risen by 50 per cent since fiscal 2011 to $30 billion last fiscal. Iron-ore exports, on the other hand, have fallen from $6 billion to just $1.6 billion after the mining ban in Karnataka and Goa. This has meant India’s trade deficit in mining, measured as the difference between iron-ore exports and coal-plus-metal scrap imports, widened to 1.5 per cent of the GDP last fiscal from just 0.9 per cent in 2011. The impact of this increase on India’s CAD is even larger than the impact of rising gold imports over the same period.
To correctly evaluate the contribution of a commodity to the CAD, it is necessary to look at its trade deficit — or its excess imports over exports — rather than just the imports. Such an analysis reveals that while gold import did increase between fiscals 2011 and 2013, it was largely offset by the export of gold jewellery and coins. Net-net, the gold deficit rose by only 50 basis points, from 1.7 per cent of the GDP in fiscal 2011 to 2.2 per cent in 2013, even though gold imports had surged far more.
In other words, mining issues were more to blame for the surge in India’s CAD to over 4.5 per cent of the GDP in fiscal 2013 from under 3 per cent in 2011. In fiscal 2014, restrictions on gold imports halved the trade deficit on gold to 1 per cent of the GDP, but the policy deficit remained high at 1.5 per cent, making it the second-biggest inflator of the CAD after oil.
Between fiscals 2011 and 2013, India’s trade deficit in oil, the single largest factor driving up the CAD, rose to 5.5 per cent of the GDP from 3.8 per cent of the GDP. In this period, India’s oil imports rose by 2.6 per cent of the GDP because crude prices shot up to around $110 per barrel from $85, but domestic prices hardly increased. Fortunately, the worry on oil seems to have abated in recent months, partly due to luck (lower oil prices) and partly due to much-needed fiscal reforms (phased deregulation of diesel prices and market-price alignment of petrol).
Globally, oil price dynamics are changing structurally. Despite persistent geopolitical tensions (Iraq, Gaza, Ukraine), crude hasn’t flared up because Libya and Iraq have pumped it up, even as the US took shale gas production to new heights. Crisil Research believes that oil prices are likely to gradually trend down to $95 per barrel by 2018.
India’s focus thus far has been to restrict gold imports to keep the CAD in check. But the point to note is that gold prices have fallen far below fiscal 2013 levels. The Bloomberg consensus forecast sees gold at $1,240 per ounce this year, against $1,650 in fiscal 2013. That being the case, even if import volumes rebound to the pre-curb levels of 1,000 tonnes per annum, the trade deficit on account of gold won’t rebound to previous highs. Falling prices also dull the perception of gold as a hedge against inflation, which, in turn, will reduce pressure on gold imports.
So what needs to be watched closely at this juncture is India’s rising trade deficit in mining. Over the last three fiscals, thermal power capacity addition has doubled to 16-17 GW annually from 6-7 GW annually in the two years preceding them. In contrast, growth in domestic coal production has slowed from 4 per cent to 2.2 per cent over the same periods. With over 50 GW of thermal power capacity additions expected in the next five years, coal shortage, and therefore imports, will surge if the government doesn’t find supply solutions in double-quick time.
The cabinet has already passed an ordinance to re-auction coal blocks to state utilities and private companies in the steel, power and cement sectors for captive consumption. Besides a transparent e-auction system, the government must streamline and accelerate the process of environmental clearances and land acquisition approvals for the fresh allotments. Any delay in production due to the lack of approvals could create a huge downside for the mining and power sectors.
Similarly, the ban on iron-ore mining was recently lifted in Goa. Now the state must fast-track clearances so that production can resume, exports begin and metal scrap imports by steel players be reduced, ultimately easing the pressure on the CAD. In Jharkhand, too, where the mining leases of the majority of the iron-ore mines were cancelled last month, the state must immediately set up a transparent mechanism to renew leases so that production can resume. All resolutions must necessarily be structural if India is to sustainably rein in the CAD and not resort to stop-gap measures such as curbing gold imports.
The quantitative easing programme of the US Federal Reserve is ending and the first rate hike in the US is expected by the middle of 2015. The consequent rise in interest rates there could trigger capital withdrawals from emerging economies, including India. It is, therefore, important to structurally reduce India’s vulnerability to external shocks.
Joshi is chief economist and Saraf is economist, Crisil
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