External account worries

Govt must work harder to counter decline in exports

The Reserve Bank of India has released data for India's balance of payments in the third quarter of 2015-16 - the months between October and December, 2015, inclusive. The headline news was good: that the current account deficit, or CAD, narrowed to $7.1 billion in that period, which amounts to 1.3 per cent of gross domestic product or GDP. The CAD for the equivalent quarter of 2014-15 was $7.7 billion, or 1.7 per cent of GDP. The trade deficit, at $34 billion, was $4.6 billion less than in the equivalent quarter of 2014-15 and $3.4 billion less than in the second quarter of the current financial year. A cursory examination of these numbers would suggest that India's external sector is strong, and there is no cause for worry. This conclusion would also fit with the intuition that India, as a major commodities importer, would in general benefit from the long downturn in the global prices of commodities.

However, a closer look at the numbers suggests that any such confidence might be misplaced. In fact, there are three significant weaknesses in India's external account, all of which have been highlighted by the data released by the RBI. The most obvious is the weakness in exports. Exports of goods brought in $64.9 billion in Q3, 2015-16, down by $15.2 billion from the equivalent quarter in the previous year. This is not entirely due to lower fuel prices. Exports of petroleum, oil and lubricants fell in value by only $7.6 billion. In other words, exactly half of the decline in exports was due to non-oil goods. The continuing weakness in India's non-oil exports is problematic, as it is happening in a time in which many peer countries are growing their exports, such as Bangladesh and Vietnam. The structural changes needed to render Indian exports competitive are clearly not yet in place. If export growth does not revive soon, then there is a significant weakness at the heart of India's external account.

Two other specific sectors are worthy of mention as causing concern. One is remittances from overseas Indians. The country received remittances from overseas Indians totalling $14.8 billion during October-December, 2015. This was the lowest in 18 quarters. In the corresponding months of the previous year, remittances had been $15.97 billion; in the previous quarter of 2015, remittances had been $15.9 billion. It is likely that weaker oil prices have hit the incomes of Indians in the Gulf states. This, again, moderates the positive effect that low fuel prices have had on the CAD. And then there is the deceleration in services exports, particularly software exports and business services exports, which together account for more than half of services exports. In software exports, growth is barely positive; in business services exports, there is a decline. This again indicates that the commodity downturn should not lead to complacency about India's balance of payments situation. It is true that, currently, low fuel prices and a sharp increase in foreign direct investment mean that the situation appears comfortable. But both these variables cannot be controlled by policy. If they reverse, then the comfort on this account goes away. The government must work harder to counter the decline in exports of both goods and services.