The Hindu Business Line : Disquiet on external trade

At first glance, the data for external trade released for the July-September 2006 period seem to indicate a counter-trend to the growth story. With a promise of an 8 per cent GDP growth to be sustained over the coming calendar, one would have expected an equally happy story on the external front. But that is not so; the trade data show widening gap between exports and imports and a ballooning trade deficit — at around $6 billion, double that of September 2005. This was no sudden surge but represented a trend visible all through the seven months of 2006. The merchandise trade gap was partly filled by growth in invisibles that mitigated somewhat the deficit on the current account.

The official explanation for the increased deficit is by now familiar as it focuses on crude oil imports coupled with the rise in its prices that left the country holding a stiff import bill. But, unlike the previous year, exports did not fare well enough to help ease the strain. Year-to-year, exports grew just around $5 billion between September 2005 and 2006. In the seven months of 2006 there were wide variations in growth, from 9.3 per cent in February to 40 per cent in July. Then they began to dip. On the other hand, the invisibles account proved once again, if proof were needed, that the global demand for Indian skills has helped the economy tremendously with remittances remaining as strong as they were the previous two years, growing 28 per cent. But the reverse trend, also a result of globalising, was the rise in invisible payments that grew sharply at 39 per cent on account of more Indians travelling abroad, services and dividend and profit payouts.

Given the robust growth sentiments, capital inflows also remained vigorous in the form of Foreign Direct Investments that more than doubled. But portfolio investments in the period recorded a dramatic decline from $5.4 billion in September 2005 to $1.6 billion 12 months later. Yet, reserves increased by $13.7 billion in the six months to September 2006 compared to $1.5 billion in the corresponding previous period. On balance, the growth in forex reserves, despite a decline in portfolio investments, heralds a new trend that should be encouraged. However, rising forex flows tend to strengthen the rupee as happened last year and the Finance Minister has to find ways to attract more of them and yet keep the rupee weak to encourage exports. Easing capital controls even more is one of the best ways of meeting both objectives. That is the New Year's promising challenge.

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