Encouraging signs

Good export performance reduces risk of rupee volatility

The merchandise trade numbers for June 2014 were published by the commerce ministry on Wednesday. They indicate that exports grew by 10.2 per cent in dollar terms over June 2013, a significant acceleration over the pace of the past few months. Imports grew by a more modest 8.3 per cent, also something of a turnaround from a decline or sluggish growth over the past few months. Within imports, oil and related products grew by over 10 per cent, while imports other than oil grew by about seven per cent. This took the trade deficit for June to about $11.8 billion, slightly higher than the $11.2 billion seen in June 2013. For the first quarter of 2014-15, however, the cumulative trade deficit came in at $33.1 billion, significantly lower than the $48.3 billion that was registered in the first quarter of 2013-14.

Both the export and import numbers provide some signs of encouragement. Apart from the impact of the exchange rate, which is about 10 per cent lower against the dollar than a year ago, the predominant driver of exports is the state of the global economy. With the United States recovery now consolidating, notwithstanding the occasional blip in the growth rate, rising consumer demand seems to be benefiting Indian exporters in a relatively competitive exchange-rate situation. With the European and Japanese economies also steadying, the prospects for export growth in traditional markets look bright. Growth rates over the next few months should remain positive. On the import side, a decline, while good for the current account, indicates a slackening of demand domestically, reflecting a sluggish growth situation. The pick-up, even if modest, in June reinforces some other indicators - the Index of Industrial Production acceleration in May and the automobile sales figures for June - in suggesting that some sort of revival in growth is under way. With capital flows looking relatively solid and stable in the wake of the government's first Budget, the risks of high volatility in the rupee are clearly diminishing as a result of the positive outlook on trade deficit and, through it, the current account.

This bodes well for the management of two other risks that are looming. On the external front, while oil prices have been remarkably steady amidst the conflict situation in Iraq, instability and escalating conflict in the broader West Asian region can quickly translate into a price surge. With an already high current account deficit, this would have been a guarantee of sharp rupee depreciation. But that does not seem very likely in current circumstances. Domestically, it is time to come to terms with the south-west monsoon being deficient, with inevitable consequences for food production and prices. To the extent that imports can help mitigate potential price pressures, they can be undertaken without much concern about current account impacts as long as exports grow at these rates and capital inflows remain robust. For the former to happen, India's traditional export markets must continue to recover, which looks like a reasonable prospect, with a caveat about oil prices. For the latter, the government needs to provide continuous reassurance to domestic and global investors that it is coming to grips with the various problems in the economy. In this regard, swift action and effective communication are imperative.