Evidence of slowing down?

The external trade data for December and January, released by the ministry of commerce and industry on Tuesday, reinforce the sense of contradiction that was apparent last week when both the advance estimates for the full year's GDP and the December data for the Index of Industrial Production (IIP) were put out. On the one hand, GDP is estimated to grow at over 8 per cent for the full year, powered by a manufacturing sector growing at over 9 per cent. On the other hand, the IIP indicated a somewhat moderating performance for the industrial sector as a whole, largely attributable to its mining and electricity components, but also the result of some sluggishness in manufacturing. The export performance indicated in the latest release is more in line with the IIP numbers. In December, exports grew at the rate of 16.2 per cent. From this perspective, the good news is that they grew by 21.5 per cent in January, suggesting acceleration and auguring well for the manufacturing numbers of that month. For the year as a whole, exports are likely to grow by about 20 per cent, nearly maintaining the trend of the last few years and ensuring that the share of exports in GDP continues to climb.

On the import side, though, there are clear causes for concern. In December, total imports grew at 14.1 per cent, but this was predominantly due to a 64 per cent growth in oil imports, which account for about 30 per cent of the total bill. Non-oil imports grew at a mere 1.5 per cent. The January picture was healthier, but not by much. Non-oil imports accelerated to 9.5 per cent while oil imports slowed marginally to 58 per cent. Total imports increased by 22 per cent. There is a striking contrast between the performance of non-oil imports during these two months and the rest of the year; during the April-January period, they grew at a relatively fast clip of 18.8 per cent. Since a substantial proportion of merchandise imports falls into the category of intermediate goods, this pattern must be seen in conjunction with the rather dramatic slowdown in the domestic production of intermediate goods as revealed by the December IIP numbers. If the growth momentum is as strong as the GDP numbers suggest, particularly in the manufacturing sector, one would have expected inputs into that sector to be growing quite rapidly as well. If they were not being produced domestically, they would at least have been imported. But, if imports themselves are showing such distinct signs of slowing, one would have to wonder what the growth momentum is doing for raw materials.

Finally, the trade deficit, which widened by a healthy 48 per cent during the April-January period, helping to absorb the large inflows of foreign portfolio investment during that period and keeping rupee appreciation in check, seems to have reversed direction. The deficit declined by 10 per cent in December and 13.4 per cent in January. If investment flows continue unabated, persistence of this reversal will revive the pressure on the rupee to appreciate, forcing the Reserve Bank of India to once again make the choice between letting this happen and accumulating reserves to hold down the exchange rate.