A V Rajwade: EAC's trade account projections already off

In an article published in this paper last Wednesday ("Leads, lags and the current account"), I had made a reference to the complacency on the growing deficit on current account, manifested in the Economic Outlook for 2007-08, submitted to the Prime Minister by the Economic Advisory Council (EAC), last month. Before looking at the EAC numbers, take a look at the first three months' merchandise trade data, reported by the Director General of Commercial Intelligence and Statistics (DGCI&S). To be sure, these numbers are compiled on a different basis from the RBI's Balance of Payments data: DGCI&S data are on "customs cleared" basis "" and therefore, do not capture defence imports, aircraft, ships and other offshore vessels, and so on.

But to come back to the DGCI&S data, much of the media comment has centred on export growth (18 per cent from April to June, 2007), a factor used to argue that the appreciation of the rupee has not affected our export competitiveness. As I have argued earlier as well, we need to look at the impact of the exchange rate on the tradable sector as a whole, and not just on exports: imports have gone up by a much sharper 34 per cent, though oil imports were just 4 per cent higher than in the corresponding period last year. The bulk of growth in imports has been registered by non-oil imports, at 50 per cent. The result is that the merchandise trade deficit for the quarter has gone up to $20.6 billion, as against $11.8 billion in the corresponding period last year, or an increase of 75 per cent "" this increase is well in alignment with the way the trade deficit has been growing over the last several years, at 70 per cent per annum compound (see World Money, April 30).

This newspaper reported (July 26) the major findings of a survey of exporters conducted by the commerce ministry between March and June. One would have, of course, preferred if the ministry had done a survey of the tradables sector as a whole, that is, including the impact on competitiveness of domestic industry with imports. But this apart, some of the highlights of the survey are:

Textile and garments: job losses of 200,000 and loss of production capacity of 20-25 per cent;

Processed agricultural products and engineering goods: cash losses;

Chemicals: reduction in exports of 20-25 per cent.

Subsequent reports in this paper have focused on the plight of carpet makers in Mirzapur/Bhadohi, sports goods makers in Jalandhar, the footwear industry in Agra, and so on.

The EAC report projects that "the merchandise trade deficit on DGCI&S basis is ....likely to rise by 35 per cent to over $76 billion." Given that, on that same basis, the trade deficit has gone up by 75 per cent, in the first quarter, it seems that the EAC expects a much smaller rate of increase in the deficit over the remaining three quarters! This conclusion seems surprising given two major changes in the current fiscal year:

For one thing, Q1 has witnessed a very sharp appreciation of the rupee. Since the impact of exchange rate manifests in trade numbers with a lag, the appreciation would start getting reflected in exports in the following quarters in a much more severe fashion. However, the EAC seems to believe that export growth will continue at 18 per cent, the rate in the first quarter, for the rest of the year. The EAC obviously seems to believe that exports display no elasticity with reference to the exchange rate. (Incidentally, would the Prime Minister agree with this proposition, given his research of the subject as an economist from the 1960s onwards?)

If, to my mind, the EAC is over-optimistic on exports, it also seems to totally gloss over the much higher oil prices currently ruling. The per barrel price of the oil basket India imports, has gone up from $56 in Jan-Mar, 2007 to $66 in Apr-Jun, and $73.5 at the end of July 2007, an increase of 30 per cent over January to March.

Overall, given also the increasing consumption of oil and the 50 per cent rise in non-oil imports in Q1, the EAC's estimate of a just 23 per cent increase in imports for the whole year seems to be a gross underestimate. The trade deficit figure may well cross $100 billion!

It would be sad if the EAC is taking a "politically correct" stand in its projections, by not analysing the impact of a rising rupee on the trade and current account deficits. Surely one expects a more analytical stance from such an august body. This apart, measures like tinkering with interest rates on export credits, tweaking duty drawbacks, micromanaging ECB end-use, and so on, would do little to correct the sharply growing deficit. We seem to be going back to the old habits of micromanaging the external sector, avoiding facing the root problem, namely the exchange rate. It did not work then, and is unlikely to work now!

avrajwade@gmail.com