According to the DGCI&S release on India’s exports, imports and trade balance, India’s trade deficit stood at whopping $72.5 billion during April-February 2008 as against to $49 billion during the same period previous year. Imports grew by 30.2% while export grew by 22.9 percent during the same period. Preliminary data on India’s Balance of Payments (BoP) for the third quarter (Q3) i.e., October-December 2007 of the financial year 2007-08, reveals a current account deficit (CAD) of $5.4 billion, bringing April-December 2007 CAD to $16 billion ($14 billion in last year for the same period).
On surface this doesn’t look like good news, however looking at the sources of change in the current account provides interesting reflections. Merchandise exports recorded a growth of 34.9 per cent in Q3 of 2007-08 as compared with 20.9 per cent in Q3 of the previous year. Net invisibles continue to do well, growing from $ 12.8 billion in Q3 last year to $20 billion this year. What changed, to cause a larger trade deficit, was a sharp rise in imports.
Exports were at $41.7 billion during the quarter compared to $30.9 billion in the Q3 of the previous year. This was a decent, though not starring performance. However, imports blastoff up to $67 billion during the quarter against $47.5 billion in Q3 of 2006-07. With a sharp surge in imports but not in exports, the trade deficit widened to $25.4 billion, as against $16.5 billion during the corresponding period of 2006. Given the net invisibles earnings the current account recorded a deficit a deficit of $5.4 billion.
A rise in imports is worrisome when caused by external shocks such as a rise in higher oil prices. However, import figures show that during Q3, what really changed was non-oil imports, capital goods rose sharply by 53 per cent. Oil imports, as per the DGCI&S data, increased by 21.7 per cent in April-December 2007 (39.4 per cent in April-December 2006). According to the Ministry of Petroleum and Natural Gas the volume of oil imports increased by 11 per cent in April-December 2007. The commodity-wise export indicated that growth in exports of petroleum products (35.4 percent), engineering goods (22.4 per cent) and gems and jewellery (25.5) remained the major drivers of export growth.
Non-oil imports such as capital goods are leading indicators for growth in industry. They increase when domestic and/or export demand is strong. The sharp rise in non-oil imports over Q3, hence, augurs well for India. We would be lamenting, if there was a slump in imports growth!
Under some circumstances, CAD can signal economic problems that call for changes in economic policies. However, it at best provide mixed and ambiguous evidence about appropriate economic policy changes because the current account agglomerates a large array of underlying economic factors. Sometimes it results from new investment opportunities created by technical change, leading countries to engage in net borrowing on world markets to finance those investments. At other times, it results from reductions in net national savings rates, due to changes in consumer confidence that lead to changes in consumer expenditures, or due to changes in tax rates that affect after-tax savings rates, or due to changes in government fiscal positions that affect national savings. India’s CAD today reflects three main factors: (1) increase in investment opportunities; (2) low rates of saving; and (3) economic disruptions in other economies.
Current accounts involve inter temporal trade, CAD means that the Indian trades claims on its future production for current goods and services. Economists often suggest that a CAD threatens future economic problems if current spending falls on consumption rather than investment. That is not the case in the India today, where CAD has financed an investment boom. As a matter of pure accounting, we can divide factors affecting CAD into those affecting investment and those reflecting national savings. The major factor responsible for the deficit is the high rate of investment in India. A secondary factor is the low savings rate. Evidence over many countries and time periods shows that growth rates of exports and imports are procyclical, rising and falling with the growth rate of real GDP. However, exports typically vary less than imports; consequently, the trade deficit is distinctly procyclical.
While Indian CAD results partly from Indian conditions and policies, they also reflect conditions and policies in other countries. Credit crisis in western economies and, more recently, slowing US economy, may have contributed to the Indian current account deficit. These factors have also contributed to appreciation of the rupee on foreign exchange markets.