Trade deficit balloons to a four-year high; tax collections crawl.
The economic slowdown in the US and the euro zone has hit India’s merchandise trade sector. Addition of new export destinations could not arrest the effect of slackening demand in these advanced economies, as India’s trade deficit hit a four-year high of $19.6 billion in October. Export growth came down to 10.8 per cent, even as import growth remained steady at 21.7 per cent. That has raised the spectre of the trade deficit breaching even the $150 billion dollar mark this fiscal, a little more than eight per cent of India’s estimated GDP this fiscal (based on the Budget estimates of economic growth).
A slowing domestic economy has had its own impact, coupled with the Centre’s move to cut taxes on petroleum products. The twin factors led to a drop of 2.5 per cent in indirect tax collections in October. Already, gross direct tax collections had dipped 0.61 per cent in October.
| PLOT THICKENS IN SLOWDOWN STORY |
| * Trade deficit at a four-year high of $19.6 billion in October. It has reached an unprecedented $93.7 billion in the first seven months of FY12, can reach $150 billion this fiscal |
| * Indirect tax collections down 2.5% to Rs 30,278 crore in October |
| * Gross direct tax collections down 0.61% to Rs 27,039 cr in Oct |
| * GDP growth at a six-quarter low of 7.7% in April-June |
| * The index of industrial production (IIP) at sub-5% in July, Aug |
| * The core sector, with 38% weight in IIP, grew just 2.3% in Sept |
| * Services PMI contracted for the second month in a row in Oct |
Merchandise shipments from India registered 10.8 per cent growth, at $19.9 billion, while imports grew by a steady 21.7 per cent, at $39.5 billion, in October, according to initial numbers released by the ministry of commerce and industry.
The rate of growth in exports has been plummeting continuously since July, when it was 81.8 per cent. For imports, the monthly growth rates have been highly volatile.
Even engineering products, termed a growth story in exports, grew just 2.6 per cent to $4.4 billion in October, while petroleum saw just 9.4 per cent growth in exports. Drugs and pharma and readymade garments, however, grew 20 per cent in the month.
“This is clearly a reflection of the global economic environment, as a result of which a change is emerging in our entire export basket. We need to wait and watch and see how the third quarter plays out. In any case, it would not be the same as the first quarter,” said Anis Chakravarty, director, Deloitte, Haskins & Sells.
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Exporters feel the euro zone crisis is likely to affect exports even more in the coming months. According to the Federation of Indian Export Organisations, the government should provide export credit at not more than seven per cent and it should also make foreign currency credit cheaper. The balance of trade in the first seven months of the fiscal through October has already reached an unprecedented level of $93.7 billion. During the period, exports reached $179.8 billion, up 46 per cent year-on-year, while imports touched $273.5 billion, up 31 per cent over last year.
“This is very serious. At this level, we will breach $150 billion in trade deficit. The high deficit is not because imports are growing, but because exports are falling,” said commerce secretary Rahul Khullar.
The Prime Minister’s Economic Advisory Council (PMEAC) has already pegged the merchandise trade deficit at $154 billion this fiscal.
However, that is not expected to widen the current account deficit (CAD) much. The CAD was pegged by the PMEAC at 2.7 per cent of GDP, at $54 billion, as invisibles such as the services trade balance were expected to show up.
But, if the services trade balance also slows down, the CAD could become a problem. So far, FII and FDI inflows have been good, so the financing of CAD has not become a problem. But if they dry up, given the external shocks, there will be more problems.