Rising trade deficit, crude to maintain pressure on India's external sector

Some gains likely from US-China tariff war, with exports to China rising; softening of inward FDI remains a worry

Global growth prospects have eased up, buffeted by successive trade restrictive measures from the US and China. IMF data from the World Economic Outlook Update released in January projects a 3.5 per cent rate for 2019, a 0.2 per cent dip from last October’s projections. There is no trigger in the global economy to counter these measures, but enough to exacerbate those. 

The immediate risks are of a no-deal exit by Britain from the European Union by the end of March, and successive elections in several large emerging economies other than India. These are Indonesia, South Africa and Nigeria. However, weaker growth has a positive effect too, as it is likely to keep international crude prices soft at about $60 a barrel, which is less than the $65 a barrel estimated in Budget 2018-19. 

Balance of payments: 

In 2018-19, the current account deficit is likely to close out at a softer 2.6 per cent, after threatening to reach three per cent of GDP when oil prices flared through October and November. It could improve closer to 2 per cent in 2019-20, but will still keep India’s external sector “highly vulnerable to global crude price movements” as an RBI Mint Memo notes. The weakness of Indian exports, which have averaged 13.79 per cent (April to December) despite a low base, has also kept the trade deficit, including services, at an uncomfortably high $141.2 billion. 

Netting out petroleum and gems and jewellery, Indian exports in the April-December 2018-19 period rose just 7.90 per cent. The economy might however make some gains going ahead because of the US-China tariff war, to garner more exports to China. This would also go some way to correct the trade deficit with China. But new pressure points have emerged in imports with a sharp rise in coal imports due to increase in both volume and international prices, even as gold imports tapered somewhat. 

Another area of worry is the softening of inward foreign direct investment (FDI). RBI data shows net FDI declined by almost 10 per cent to $17.7 billion in the first six months of 2018-19 ($19.6 billion same period,  2017-18). While net inward FDI shrunk, there was a rise in net outward FDI. Given global worries, FDI could remain tepid going ahead. 

Of even bigger salience for India will be the Regional Comprehensive Economic Partnership, the 16-nation  country trade pact. To enter the global value-added chain, India needs to be in it. The signing of the deal has, fortunately for India, got pushed to 2019. To derive mileage from the treaty, India needs to shake up domestic industry to prepare itself and enter the global value-added chain. 

Because of the combined pressure of rising CAD and trade deficit, India’s  foreign exchange dipped below $400 billion. As on January 2019 it is $397 billion. The presence of the reserves, however, helped keep the movement in the Indian rupee within a relatively narrow range, despite having touched a life time low of 74.35 to the dollar in early October. It recovered to 69.53 by the end of December, with the RBI selling $26.5 billion to keep the movement in the exchange rate, orderly. However as most emerging markets depreciated against the dollar, the 36-country REER did not turn particularly adverse.