Oil Dependence Keeps Trade Deficit Alive, but $1 Trillion Export Goal in Sight: IIFT VC
IIFT VC K. Rangarajan explains why India's trade deficit persists and how petroleum exports and new FTAs could push exports past $1 trillion.
India's struggle with a persistent trade deficit is deeply tied to its structural reliance on imported oil, according to K. Rangarajan, the Vice-Chancellor of the Indian Institute of Foreign Trade (IIFT). In an exclusive interview, Rangarajan highlighted that while the deficit is unlikely to vanish entirely as long as oil imports remain high, there is a silver lining in the form of value-added petroleum exports.
The Oil Dilemma and the Refining Silver Lining
The Vice-Chancellor explained that the dependence on foreign oil remains a fundamental challenge for the Indian economy. However, he noted that the gap is being partially narrowed through strategic value addition. India has positioned itself as a critical hub for refining and exporting petroleum products, a trend that has accelerated due to global disruptions caused by the Middle East crisis and ongoing warfare.
By importing crude and exporting refined, high-value products, India is effectively offsetting a portion of the heavy costs associated with its energy imports.
Eyes on the $1 Trillion Milestone
Looking ahead to the financial year 2027 (FY27), Rangarajan expressed strong confidence in India's export trajectory. He believes the country is well-positioned to surpass the USD 1 trillion export milestone.
This optimism is rooted in a shifting global trade landscape and a more favorable environment for external engagements. Furthermore, he estimated that India's overall economic growth rate could hover between 6% and 7%, bolstered by changing geopolitical dynamics and expanded international ties.
Beyond Policy: The Need for Ground-Level Execution
While the government has introduced various industry-friendly interventions to boost manufacturing, Rangarajan cautioned that policy announcements alone are not a cure-all. He emphasized that the real impact depends on:
- Effective Implementation: Policies must be executed efficiently at the ground level, requiring cooperation from state governments.
- Industry Adaptability: Businesses must evolve to meet changing global trade conditions.
- Understanding FTAs: The industry should not rely solely on policymakers to interpret Free Trade Agreements (FTAs). Companies need to deeply understand tariff concessions, rules of origin, and specific tariff lines to maximize benefits.
The Evolution of Free Trade Agreements
Rangarajan described the new generation of FTAs as comprehensive tools that go beyond simple tariff reductions to include services and supply chains. He pointed to the India-UAE trade agreement as a success story where exports have already begun to rise.
He also expressed positivity regarding the India-New Zealand FTA, the potential implementation of an agreement with the European Union, and a possible future arrangement with the United States.
Global Pressures and Geopolitical Navigations
The 'Trump Factor' and US Tariffs
Addressing concerns regarding the tariff policies of US President Donald Trump, Rangarajan suggested that extreme uncertainty and frequent changes in tariffs could eventually backfire on the US market itself. He cited China as an example, noting that it remains a dominant exporter to the US despite facing tariffs as high as 100%.
Investment and Strategic Shifts
To truly become a global manufacturing hub, Rangarajan argued that India needs increased foreign investment specifically in the digital and technology sectors. Interestingly, he noted that Indian companies are now making strategic overseas investments to explore alternative production bases, helping them hedge against tariff-related uncertainties.
Navigating West Asian Turmoil
Despite the volatility in the Red Sea and the Strait of Hormuz, the IIFT VC believes India is relatively secure. This stability is attributed to India's strong diplomatic ties across various nations. While global trade growth is estimated at around 1%, India and the ASEAN region are projected to outperform the average with growth exceeding 2%.