Growing deficit

The numbers for merchandise exports and imports in August indicate a persistence of the pattern seen with particular sharpness in the July numbers. In July, while exports in dollar terms had grown at a relatively healthy rate of 18.5 per cent, they had slumped to a growth rate of 3.9 per cent in rupee terms. The implication of this divergence was that exporters on the whole were able to protect their revenues in dollar terms by keeping prices steady but were seeing their rupee revenue growth being hit by the appreciation of India's currency vis-à-vis the dollar. A similar divergence is visible in the August numbers as well but, by both measures, the growth rates are slightly better than in July. Dollar exports grew by 18.9 per cent while, in rupee terms, they grew by 4.3 per cent. These numbers take the April-August growth rates in dollar and rupee terms to 18.4 per cent and 5.6 per cent, respectively. In whatever currency the numbers are viewed, performance is well short of target, and nothing on the horizon suggests that performance will improve in the rest of the year.

Meanwhile, imports in dollar terms grew by a more rapid 32.6 per cent during August, slightly higher than the rate for the April-August period. In rupee terms, they grew by 16.4 per cent, taking the April-August growth to 17 per cent. Both sets of numbers are much bigger than the export growth figures. It gets worse when the combined performance of oil and other imports is broken up. While oil imports grew by about 19.5 per cent in dollar terms in August, their growth rate during April-August was a mere 8.3 per cent, highlighting the fact that a significant proportion of the recent increase in crude oil prices has been offset by the appreciating rupee. By contrast, non-oil imports grew by 39.6 per cent during August and a higher 42.9 per cent during the April-August period. This took the trade deficit to $6.9 billion (Rs 28,000 crore) during August and $32.5 billion (Rs 1,33,000 crore) during the April-August period. This corresponds to about 8 per cent of GDP, a potential source of concern in some situations but, in the Indian context, being offset by large surpluses on the invisibles account and the high level of capital inflows, notwithstanding the recent turbulence in world markets.

Even if the rupee stays for some time at the level where it is today, this pattern is likely to persist. The government has put in place some measures to provide relief to exporters and is reportedly considering extending these. In the meantime, the Reserve Bank of India has also increased the limits on investments abroad by Indian companies and individuals. Both these sets of measures are well-intentioned, but do not address the fundamental issue, which is that, as long as India continues to grow at its current rate, which most people expect will be the case for some time, more money will be invested into India than will be invested out of it. Rather than providing false hopes to exporters about fiscal offsets or the exchange rate remaining in favourable territory, it would be more useful for them to get some clear signals on where the exchange rate is headed and to create efficient ways in which they can hedge against movements in it. Any exchange rate regime will have both positive and negative impacts on various groups in the economy. The lack of clarity on what exactly that regime is happens to be the issue today.