Ballooning trade deficit may put more pressure on CAD

India’s trade deficit widened to a record $166.8 billion in the first 11 months of this financial year, as growth in exports slowed to a three-month low in February, owing to the fragile recovery in the global economy. Imports grew faster, due to high oil prices and gold & coal imports.

If the surplus in services trade does not improve dramatically, this could have an adverse impact on India’s current account deficit (CAD), already a record four per cent of the gross domestic product (GDP) in the first nine months of this financial year. Analysts hoped the CAD would stand at 3.6 per cent of the GDP this financial year. While releasing the initial estimates of exports and imports in March, commerce secretary Rahul Khullar had said, “There is a large ballooning of the trade deficit. From October, exports started declining sharply, while the lag in imports’ deceleration was larger.”

 

In February, exports rose 4.2 per cent to $24.6 billion, while in a stark contrast, imports grew a healthy 20.6 per cent to $39.8 billion. This resulted in a trade deficit of $15.2 billion, the highest since November 2011. Total exports during April-February rose 21.4 per cent to $267.4 billion, while imports stood at $434.2 billion, up 29.4 per cent.

If the trend persists for another month, exports may not reach the targeted $300 billion this financial year and may stand at about $290 billion, said members of an exporters’ federation.

The steady deceleration in exports was primarily due to the slowdown in demand in Europe and the US, which account for almost 35 per cent of India’s exports. Growth in exports plummeted from 82 per cent in July to 4.3 per cent in February due to weak demand in matured markets.

Khullar had said this financial year, exports may stand at $292-298 billion, while imports would be $470-480 billion. The trade deficit for the whole year would end up at $175-180 billion.

In February, the Prime Minister’s Economic Advisory Council had said the trade deficit for the whole year could touch $175 billion, or 9.3 per cent of the gross domestic product, with exports at $304 billion and imports at $479 billion. The Federation of Indian Export Organisations (FIEO) said the government should extend interest subvention to all export sectors till March 2013 and address the issue of tax deduction at source on foreign commission, which has led to an anomalous situation due to contrary court verdicts.

FIEO president M Rafeeque Ahmed said, “We are inching towards our target of $300 billion, but may fall short of it and reach $290 billion, with expected average growth of 20 per cent.”

“Growing protectionism would further affect global trade, which is expected to grow four per cent in 2012, as against 14 per cent in 2010,” he added.

Items that registered growth in exports during the April-February period were engineering goods, petroleum, gems & jewellery and ready-made garments, which stood at $54.5 billion, $53 billion, $40.6 billion and $12.1 billion, respectively.