Economists divided over global slowdown impact on trade deficit

Even though the commerce ministry believes that trade deficit will not rise as high as $147 billion this financial year, double of the $73.5 billion in the first half, a key advisor to the prime minister pegs it higher at $150 billion.

In the first half, merchandise exports grew by 52.1 per cent to $160 billion compared to the corresponding period in the last financial year, and merchandise imports by 32.4 per cent to $233.5 billion, netting trade deficit at $73.5 billion. On a pro rata basis, it means $147 billion of trade deficit this year. However, Commerce Secretary Rahul Khullar said trade deficit would not increase that much since growth in imports will come down faster than exports in the remaining period of this financial year.

However, Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan told Business Standard that trade deficit will touch $150 billion this year.

“We don’t know how trade will behave in the rest of the year, but trade deficit will be at $150 billion on account of high oil imports," he said.

In fact, exporters body, the Federation of Indian Export Organisations (FIEO), also pegged the trade deficit at $150 billion for the current financial year. Others, however, preferred going by the Khullar’s theory. “The global economy is slowing and import slowdown will be more marked than exports,” said Madan Sabnavis, chief economist, CARE Ratings.

If one goes by the recent export import numbers, imports growth is slowing at a much faster rate than the export growth. In August, imports grew by 41.8 per cent, while in September they grew by just 17.2 per cent. While exports for August grew by 44.2 per cent and in September by 36.3 per cent.

Rupee has also been depreciating against the dollar, impacting imports. “Trade deficit will be in the range of $140 billion-$150 billion,” Sabnavis said. Anis Chakravarty, director, Deloitte, Haskins & Sells, said since the exchange rate is favourable for exports, the numbers will continue to be robust. “There may be a correction in the fourth quarter,” he said, adding that trade deficit in the second half of the financial year will be lower than $73 billion.

Widening trade deficit becomes a problem as it would have an impact on the current account deficit (CAD), which also includes balance on services trade, and investment income, besides trade deficit.

If CDA widens, and slowing down of external economy slacken capital flows, financing of CAD becomes a problem. The PMEAC has pegged CAD at 2.7 per cent of gross domestic product (GDP) this year. Rangarajan stood by it. “CAD at 2.7 per cent is achievable," he said.

CAD for the first quarter stood at around 3.07 per cent of the GDP. However, Sabnavis said, "Current account deficit target of 2.7 per cent is not achievable. It will be closer to three per cent. Software/information technology exports are hit due to the global slowdown, which is a big challenge,” he said.

According to Chakravarty, CAD is a bigger worry than trade deficit. “We need to watch invisibles (services etc). However, we should wait until the fourth quarter, as the global economic situation seems to be improving with the euro zone bailout,” he said.

Software exports in India are highly dependent on the US and Euro markets. The US is still a matter of concern, said Chakravarty.

Indranil Pan, chief economist, Kotak Mahindra Bank, estimates CAD at 3.1 per cent of the GDP this year. “Effect of global slowdown will have its impact also on invisibles,” he said.