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India’s balance of payments (BoP) in the first half of 2019-20 has improved on the back of higher Foreign Direct Investment (FDI), portfolio flows and external commercial borrowings and a narrowing current account deficit (CAD); but dwindling exports and a decline in non-POL (petroleum, oil, lubricants), non-gold imports as a proportion of GDP spells possible trouble.
Weakening of global demand and the increase in trade tensions over 2018-19 have led to a decline in the merchandise exports-to-GDP ratio to 11.3 per cent, as per the Economic Survey 2019-20. The BoP position, however, improved as the merchandise imports-to-GDP ratio also declined, resulting in a net positive impact.
“This is because of the large presence of crude oil in the import basket. Share of gold imports, another important component of import basket, has remained stable in spite of rise in gold prices,” it said.
Import tariff cut
The survey pitched for a reduction in import tariffs in respect of intermediate inputs and raw material to correct the presently inverted duty structure.
“A corrected duty structure will reduce the cost of intermediate inputs imported for manufacturing of exports, thereby making the country’s exports more competitive,” it added.
This suggestion may well get reflected in the Budget for 2020-21, with the government making some further corrections in the inverted duty structure.
What is worrying about the import numbers is the reduction in the non-POL, non-gold imports as a proportion of GDP, from 2018-19 to first half of 2019-20, which is understood to be positively correlated with the GDP growth.
“Continuous decline in investment rate decelerated GDP growth, weakened consumption, dampened the investment outlook, which further reduced GDP growth and along with it, non-POL-non-gold imports as a proportion of GDP…,” the survey pointed out.
India’s net services surplus has also been steadily declining in relation to the GDP. It financed two-thirds of the merchandise deficit in 2016-17, before declining to less than half in the past couple of years.
Narrowing CAD
As per figures published in the survey, the improvement in the BoP position to $433.7 billion by September 2019 from $ 412.9 billion of forex reserves in March, 2019, was on the back of the CAD narrowing further to 1.5 per cent of the GDP in the first half of 2019-20 from 2.1 per cent in 2018-19.
Net FDI inflows in the first eight months of 2019-20 at $24.4 billion was much higher than the corresponding period of 2018-19.
Top exports
POL, precious stones, drug formulations and biologicals, gold and other precious metals continued to be the top exported commodities, while the largest export destinations were the US, the UAE, China and Hong Kong.
Crude petroleum, gold, petroleum products, coal, coke and briquettes constituted the top import items, and the top countries for imports were China, the US, the United Arab Emirates and Saudi Arabia.
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