Editorial: External comfort

The trade data for August 2008 and the balance of payments data for the April-June 2008 quarter were released in the past couple of days. Taken together, the three reports suggest that global conditions have yet to exert significant pressure on India’s external position. Whether the more recent developments, which are not reflected in these releases, change the story significantly, only the next quarterly numbers will reveal, but the view that the Indian economy is dealing with the global turbulence with a reasonable degree of steadiness is supported by the numbers so far. Indeed, on present reckoning, especially with oil prices having softened, the current account deficit for the year will probably settle at less than 3 per cent of GDP—which can be covered by capital inflows; the only risk factor here is large-scale selling on the stock market by FIIs.

On the trade front, exports grew at a healthy rate of 26.9 per cent in dollar terms in August, which, however, depressed the April-August growth rate to 35.1 per cent. The fact that August 2007 showed a phenomenal growth rate of almost 60 per cent makes the deceleration look insignificant. Of course, imports accelerated even more sharply, growing by 51.2 per cent in dollar terms in August, taking the April-August growth rate to 37.7 per cent. Oil imports dominated this increase, growing by 76.7 per cent in August, taking this April-August growth rate to 59.6 per cent. As a consequence, the trade deficit came in at almost $14 billion in August and $49 billion during April-August, almost $15 billion higher than the corresponding period last year.

The quarterly balance of payments numbers suggest that this widening trade deficit is being offset by a surge in invisibles, comprising both service exports and remittances by Indians working abroad. The latter stood at $20.8 billion during the April-June quarter, over $6 billion more than the corresponding quarter of last year. Consequently, the current account deficit, although high by quarterly standards at $10.7 billion, was only about $4 billion higher than in April-June 2007. As far as the overall balance is concerned, net capital inflows at almost $13 billion more than offset the current account deficit, but compared to last year, the gap has substantially narrowed. As a result, reserve accumulation during the quarter was barely over $2 billion, compared to over $11 billion during April-June 2007. While this indicates decreasing comfort on the Balance of Payments, there is a significant change in the mix of capital flows. While portfolio flows were negative and external commercial borrowings about a quarter of their level during the corresponding quarter of last year, foreign direct investment inflows were over $10 billion during the quarter, almost four times their level during April-June 2007.

Both the depreciating rupee and the fact that global growth did not slow down as much as was expected over the past few months account for the persistent performance of exports. Of course, the currencies of several other countries with whom India competes globally have also depreciated, so the advantage may be fleeting, even as most analysts expect growth in the US and Europe to slow considerably in the coming months. In other words, the buoyancy may not last for very long. Still, the fact that import growth is being driven predominantly by oil is reassuring because imports are bound to decelerate as oil prices decrease. Even if exports slow, therefore, the trade deficit may not face intense pressure. On the balance of payments front, the gap is clearly narrowing and prolonged global turmoil may narrow it further by deterring inflows, whether portfolio or direct. For the moment, though, the ample reserves should provide comfort.