Slowdown in trade growth

The data for merchandise exports and imports, released by the ministry of commerce and industry yesterday, reinforce the June pattern by showing a substantial divergence in the export growth rate when valued in dollar and rupee terms. During July, dollar exports grew by a healthy 18.5 per cent, more or less maintaining the trend established over the first quarter of the financial year. However, in rupee terms, they grew by a mere 3.1 per cent in the month, and by a modest 5.9 per cent over the first four months of 2007-08. The difference is largely the mathematical contribution of rupee appreciation. This pattern suggests that Indian exporters are sustaining trade growth by keeping their dollar prices constant and absorbing the bulk of the appreciation on their top line and, therefore, their margins. This is only to be expected, considering that a large proportion of Indian exports competes predominantly on price, and any increase on that score would result in a substantial loss of market share. Among India's major competitors, only Thailand has seen its currency appreciate to a comparable extent. Most other countries have contained appreciation within a much narrower range. That this is making macro-economic management uncomfortable for all of them is obvious; however, in the short term, their exporters become more competitive than India's.

Import growth in dollar terms was about 20 per cent in July, and by over 30 per cent during the April-July period. In rupee terms, however, the growth in July was a mere 4.7 per cent, although they grew by over 17 per cent over the first four months of the year. The sharp deceleration in July, from a relatively high rate of growth during the first quarter, is a warning signal. The industrial production numbers for July are due next week, and will show whether the slower rate of import growth resulted from a similar turn in industrial activity. After the first-quarter GDP numbers have shown 9.3 per cent growth, beating the forecasts of the pessimists, commentators will be reluctant to talk once again of a slowdown, but the numbers that have just come through suggest that this is a possibility.

As a consequence of these patterns, the trade deficit for July clocked in at slightly over $5 billion, or Rs 20,000 crore, taking the four-month number to about $26 billion, or Rs 105,000 crore. This is approximately 8 per cent of the four-month GDP, compared with 6.4 per cent during the corresponding period last year. Although the current account deficit is much smaller because of the surplus in the trade in invisibles, the widening of the trade deficit should make the economy's minders wary "" especially because the continuation of the past level of capital inflows cannot be assumed when there is turbulence in financial markets. The fact that the Reserve Bank's foreign exchange assets have dipped recently is relevant in this context.

Ironically, these trends may not be such a bad thing from the perspective of monetary policy, which has struggled to cope in recent months with large balance of payments surpluses. However, looking beyond the immediate horizon, policymakers need to come to grips with a macro-economic environment in which the objectives of export competitiveness, attracting foreign investment flows and managing external risks could well pull in different directions. There will be increasing pressure to make choices between these different and competing objectives.