The trade numbers for June 2008, released last week, show that exports continue to do well, but also make it clear that the country continues to suffer a monthly trade deficit of $10 billion. A little over half of this is paid for by the surplus on trade in services and by remittances from Indians overseas, and the rest is covered by capital flows. There is also the cushion provided by $300 billion worth of foreign exchange reserves, equal to about a year’s imports. These numbers do not therefore warrant worry just yet, but watchfulness is certainly called for because of the negative trends. The trade deficit, for instance, is running at more than 40 per cent annual growth. The villain of the piece is oil.
Exports during the April-June quarter were valued at $ 42.8 billion, a healthy 22.3 per cent higher than a year earlier. The growth rate was slightly higher for June, suggesting acceleration, which is good news for exporters in a relatively sluggish global scenario. The rupee depreciation against the major currencies, during the past few months, has not helped much, though. The currencies of most countries that compete with India in the global market behaved similarly over this period, and domestic cost increases have offset the potential benefits of depreciation to exporters. Whether this relatively healthy performance will continue, though, is difficult to say. There are widespread expectations that the US economy will go into recession later in the year, which is likely to bring down the growth rate of Indian exports to a degree. In any case, the ambitious target of $200 billion for 2008-09 (which needs 30 per cent growth) looks unachievable, since even the first quarter numbers have fallen short of the implicit target for the period.
Imports during the quarter grew faster than exports, by 29.7 per cent over the corresponding quarter of last year, to reach $73.2 billion. Of these, oil imports accounted for $25.5 billion, just over a third. In fact, oil imports grew by more than 50 per cent over the first quarter of last year. Here, the depreciating rupee has clearly contributed to raising the bill, even as the long-delayed and still very incomplete pass-through of international oil prices to domestic consumers continues to encourage consumption.
The trade deficit therefore crossed the $30 billion mark for the quarter, 42 per cent higher than during the first quarter of last year. At these levels, it is likely to be more than 10 per cent of GDP for the year as a whole. As the deficit widens, something which is quite likely to happen if export growth slows down and oil imports continue to grow at their current rate, the vulnerability of the economy to any disruption in other inflows increases. This could happen for any number of reasons. Service exports could become sluggish because of market conditions, while remittances are vulnerable to any disruption in West Asia. Most importantly, the direction of capital flows has reversed to some degree. If substantial capital flows out, as has happened in recent weeks, it will reinforce the concerns about emerging balance of payments pressures. The large foreign exchange reserves obviously help tremendously to minimise such concerns, but it would be unwise to ignore the direction in which the external sector is heading.