The Hindu Business Line : Worrisome data

The rising import bill and the widening trade and current account deficits reflect a disquieting trend and are worrisome from the point of view of the real economy.

The balance of payments data for the first quarter of 2008-09 reflect the trying times the economy is passing through. The import bill has shot up dramatically over the corresponding period of 2007-08, rising 33.3 per cent compared to last year’s 21 per cent. With exports growth almost flat the trade and the current account gaps have widened substantially. While the former rose to $31.6 billion, compared to $20 billion last year, the current account jumped to $10.72 billion from $6 billion. Just how much the high import bill has added to the deficit is clear from the January data that showed the deficit narrowing to just around a billion dollars.

These data are worrisome from the real economy point of view for they reflect disquieting trends. It was bad enough that export growth was somewhat subdued; but non-oil imports more than halved, at a 20 per cent growth over Q107-08. Here is one sign for policymakers that the economy is indeed slowing. From this perspective, the current account deficit is not very welcome news; so long as the deficit reflected imports that added to productivity, it could be tolerated in the short run, knowing that in the medium term, the economy would more than compensate in higher export earnings. Now, with the recession looming over the western markets and the pessimism in business expectations growing in the country, the deficit will pinch. It could have been worse but for a remarkably sustained rise in some receipts on Invisibles account, namely from remittances that jumped substantially while software earnings growth declined 5 percentage points to 20 per cent; remittances now account for 14.8 per cent of Invisibles compared to 12 per cent last year. On the debit side, payments under Invisibles increased largely on account of higher freight costs of oil imports. On balance, however, the overall current account deficit has been impacted favourably.

The best news, however, is that net FDI remained buoyant at $12.1 billion during Q1 of 2008-09, compared to $7 billion in Q1/07-08), even as FII outflows took a toll on the equity market. Of the total FDI, nearly 24 per cent went into manufacturing and 14 per cent in financial services — another good sign. Policymakers would do well to understand just how much this has benefited India’s technological standing. The Prime Minster’s advisory council on manufacturing, that recently submitted a report, does not think FDI has done much on this front. A review of the policy might just be called for.

Related Stories:
Trade deficit surges to $49.1 b during April-Aug
High cost of oil widens current account deficit
Balance of payments: Do we need to worry?

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