The Hindu Business Line : Fallout of the stronger rupee

Preliminary data on the balance of payments (BoP) for April-September 2007 confirm the worst fears of exporters and policymakers about the impact of a rising rupee on merchandise exports that grew 19 per cent in the quarter against 24 per cent in the previous one. Predictably, the decline in growth rates was most notable in textiles and textile products, coupled with a slowdown in engineering and chemicals exports. On the other hand, non-oil imports grew by 25 per cent aga inst 18 per cent in the corresponding period of 2006, led by capital goods, gold and silver. The trade deficit, therefore, widened by around $5 billion from the previous gap of $16.8 billion

The deficit would have been much wider had it not been for modest oil imports, increasing by 15.7 per cent compared to 41.0 per cent in April-September 2006. The subdued rise in the Indian basket of international crude to $69.2 per barrel in April-September 2007 from $67.2 per barrel in the previous corresponding period helped contain the import bill. Once again, earnings under Invisibles partially filled the current account deficit despite a lower growth rate 23.4 per cent, compared to 31 per cent in Q2 2006. Part of the reason for the slower pace was the decline in software earnings with growth more than halving from 37 per cent. Business services, of which management consultancy is the prominent feature, are clearly emerging star export earners; although they amount to just about half of software receipts, the earnings from such services did not register as significant a decline. But remittances or private transfers made good the drop in software receipts with a growth of 49 per cent compared to 15 per cent in the same period of 2006.

On the capital account, interestingly, tightening norms seem to have little effect on ECBs, that almost doubled during April-September 2007 over the same period a year ago. A robust stock market also saw increase in portfolio investments while direct investments rose modestly to $9.9 billion from 7.3 billion in April-September 2006. Perhaps unresolved regulatory issues tend to check the flow. Does the step-up in outward FDI to $6 billion from $2.8 billion in April-September 2006 reflect a preference for global expansion by Indian companies that policymakers should take note of? The next two quarters’ data will reflect the impact of unusually high oil prices that may not be fully mitigated by the weakened dollar. The slowdown in the West after the sub-prime crisis may impact overall trade and remittances if job cuts ensue. And if inflows continue at the current pace, and bolster the rupee, the next set of BoP data could just get more dismal.

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