Govt revises trade deficit upwards to $180bn

Arun S NEW DELHI | Updated on March 09, 2012 Published on March 09, 2012

The Commerce Ministry on Friday revised upwards its estimates of the trade deficit (export-import gap) for 2011-12 to a record $175-180 billion. This is around 9-10 per cent of the country’s GDP.

The initial trade deficit estimate for this fiscal was $130-145 billion, which was later revised to $155-160 billion. The trade deficit in 2010-11 was $130.5 billion (according to RBI data).

The latest revision in trade deficit followed imports in February outpacing exports, resulting in the trade deficit widening for the second successive month to $15.2 billion. The trade deficit for January was $14.7 billion.

The Commerce Secretary, Dr Rahul Khullar, told presspersons that exports for 2011-12 would be around $292-298 billion, while imports for this fiscal could go up to $470-475 billion. He said the trade deficit for this fiscal could touch a higher than expected $175-180 billion.

(Exports during April 2011-February 2012 were $267.4 billion, while imports during the period were $434.2 billion, widening the trade deficit to $166.8 billion).

The oil import bill — which has already risen 41 per cent to $132.6 billion during April-2011-February 2012 — is the main reason for the rise in imports and, in turn, an increase in trade deficit. The increase in oil imports can be attributed to the hike in oil prices, which have now touched over $120 a barrel.

Elaborating on the reasons for the ballooning of the trade deficit, Dr Khullar said, “The export growth rate fell faster than the import growth rate, as a result of which you have a situation in which the balance of trade in the last four-five months has been significantly higher than it was in the first six months in this fiscal.”

Though not as much as exports, imports have also witnessed a slowing down due to the weakening of the rupee (against the dollar), increasing the cost of imports.

As the average trade deficit every month during April-September 2011 was only $10-11 billion, the expectation was that it would touch only $130-145 billion this fiscal, Dr Khullar said. However, during the last five months, the average monthly trade deficit rose to $14-16 billion, he added.

The Government usually relies on partially bridging the deficit on the trade (merchandise goods) account through a surplus in ‘invisibles’ earnings from remittances, software and other services exports.

However, if the trade deficit touches $180 billion, it would mean that the current account deficit (CAD) for the fiscal would be higher than expected.

A country runs a CAD when its total imports of goods, services and transfers is more than its total export of goods, services and transfers, in turn making it a net debtor to the world.

The Prime Minister’s Economic Advisory Council (PMEAC) recently projected CAD for this fiscal at 3.6 per cent of the GDP (or $66.8 billion). This is even higher than a CAD of 3.1 per cent of GDP in 1990-91, a year when the country was hit by a balance of payments crisis, which in turn led to economic reforms steered by the then Finance Minister, Dr Manmohan Singh.

The PMEAC had projected the trade deficit to be $175 billion (9.3 per cent of GDP), with exports seen at $304 billion and imports at $479 billion.

“There is a need to take measures to ensure that the CAD is stabilised at a lower level of around 2-2.5 per cent of GDP,” the PMEAC said.

To be able to finance the large CAD in a manner that does not stress the external payment account, the PMEAC said, “There must be a clear focus on facilitating capital inflows, especially of equity.”

It also suggested reducing gold imports. Gold and silver imports for April 2011-February 2012 have risen 38.5 per cent to $55 billion as these are seen as safer assets for parking money.

“The best means of limiting the appetite for gold is to work towards making other kinds of assets more attractive, especially such financial assets as lend themselves to ready mobilisation for funding infrastructure and industrial asset creation,” the PMEAC said.

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Published on March 09, 2012
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