A safe deficit

In an earlier era, the latest trade data would have caused much hand-wringing and brows furrowed with anxiety. It turns out that (in dollar terms) exports grew by about 12 per cent in February. This is better than in some recent months, but slower than the average for the year so far (26 per cent)""which therefore could be evidence of a slight slow-down in the rate of export growth. At the same time, imports in February have grown by 21 per cent, and by 33 per cent in the year so far. The result is that the trade deficit has ballooned; merchandise imports for this year as a whole could end up being nearly 40 per cent more than exports""a record deficit of about $40 billion. Some of that deficit will be made up by surpluses on the invisible account (including software exports), but even after accounting for that, the deficit on the "current account" will be about $25 billion, or 3 per cent of GDP. That is high by historical standards, and roughly the order of current account deficit that prevailed when the economy went into crisis in 1991. However, any parallels between now and then would be mistakenly drawn.

The happy interpretation, towards which this newspaper leans, is that imports have grown faster because the economy is growing rapidly, thus creating demand for imported goods, and is also into the investment phase of the business cycle. The details of the import data endorse this conclusion because the main imports, other than oil and some commodities, are capital and intermediate goods. It is not at all unusual for rapidly growing emerging markets to run sizeable trade deficits, and many East Asian giants did so during their years of peak growth. The key issue is to make sure that the system is in fact growing at a pace that is fast enough to justify the size of the deficit, because capital imports then compensate for the deficit on the current account, and the balance of payments is not out of line. India's imports of capital so far this year have matched the deficit, which is why both the rupee and foreign exchange reserves have remained stable.

Since a good chunk of the deficit is accounted for by the imports of petroleum crude and its products, a key question for the future will be whether oil prices will stay high; if they are expected to, it adds to the urgency of raising domestic petroleum product prices to reflect their true cost. The demand for these products is largely price-inelastic, so no one expects dramatic energy-saving measures to result. But even gains achieved on the margin will be welcome.

Getting away from the nitty-gritty of the monthly, half-yearly or even yearly data, the trend over the last few years suggests that the process of India's re-integration with the world economy is now a settled fact and proceeding apace. Second, India has as a consequence become much more of a trading nation, with close to 40 per cent of its GDP accounted for by international trade. This, too, is a sign of growing maturity and confidence. So it seems fair to suggest that the era of export pessimism and import substitution is finally over.