Positive signals on trade

The trade numbers for April-May 2004, released on Monday, indicate a degree of buoyancy in India's exports that may have come as a surprise to many people.

Exports grew by almost 25 per cent in dollar terms despite recent concerns about an impending loss of competitiveness due to a steadily "" and sometimes rapidly "" appreciating rupee.

These concerns have generally proved to be unwarranted because exports have continued to grow at a reasonably healthy rate, clocking around 18 per cent in 2003-04, helped by a whopping 44 per cent in December 2003.

As against that, the rupee's climb vis-a-vis the dollar was visible from early 2003. The main reason for the apparent disconnect between the rupee-dollar rate and the country's export performance is that the dollar depreciated against virtually all other currencies.

In fact, the rupee actually depreciated against the currencies of India's three major markets outside the US "" the pound, the euro and the yen.

Exports to the US (and presumably other countries with dollar-denominated trade) did slow down, but this was counter-balanced by higher exports to the other three markets, keeping the growth momentum going.

The lesson clearly is that one needs to look at the entire matrix of exchange rate movements to be able to predict short-term variability in export growth.

This year's performance to date indicates an acceleration beyond last year's already healthy rate. Somewhat paradoxically, the rupee-dollar rate is likely to be the most important reason. The rupee appreciated against the dollar until end-March 2004.

Since then, it has been steadily depreciating, slowly at first (right through April), but somewhat more rapidly in the aftermath of the stock market decline in the weeks following the formation of the new government.

This time around the rupee-dollar rate is not moving because of the global depreciation of the dollar. It is specific to these two currencies, driven by a movement of investors out of rupee-denominated assets.

So, while India's competitiveness with respect to the other developed country markets remains, it is now increasing its short-term competitiveness with respect to the US as well.

As a result, exports to the US have probably accelerated during these two months. This will need confirmation from destination-based data, which will not be available for a while. This has undoubtedly been helped by a strengthening US recovery.

After months of jobless growth, the US is now generating significant numbers of new jobs, which means more disposable incomes to buy Indian goods with. The good news is compounded by developments on the import front.

Imports grew at a faster rate of 28 per cent during April-May, widening the trade deficit to $3.8 billion as compared with $2.9 billion a year ago.

Notwithstanding the recent exit of foreign investors, India still has to deal with a large surplus of inflows on both the invisibles and capital accounts. It is far better to use this surplus to import goods that consumers and companies want instead of simply adding to the country's already bulging forex reserves.