India’s Foreign Trade update: Q1 2007-08

A. V. Rajwade (his articles are pretty good) has lately been focusing on problems with India’s Balance of Payments. Earlier he had written in BS that RBI does not include data for trade credit (as it does not have a record of the same) which means our current account deficit is much larger than we would think it to be. It was a very intriguing piece of analysis.

In today’s BS, he points out to India’s growing trade deficit. Commerce Ministry has released the recent foreign trade data covering Q1 2007-08. The findings:

1. Exports have increased by 18% to $ 34.3 bn. In Q1 2006-07, the growth was 14%.
2. Imports by 34% to $ 54.9 bn. Oil imports by 4% to $14.8 bn and non-oil imports by 50% to $ 40 bn. In Q1 2006-07 the growth was 37%.
3. As imports have increased faster, Trade deficit has increased by a 75% to $ 20.6 bn. Last year, Q1 it grew by 100%.

Hence, all is within the trend. So what is the concern?

1. With rupee appreciating and since it works with a lag, exports would slow down and imports would increase.
2. That would mean higher trade deficit
3. We would need higher service exports to manage the deficit.
4. As rupee is appreciating, getting higher service exports would be tough.
5. Hence, most likely we would see higher current account deficit and to finance it, the capital flows would be higher, compounding the problems further.

Further AVR criticises EAC report which has underestimated the trade deficit and overestimated the growth in exports.

It would be sad if the EAC is taking a “politically correct” stand in its projections, by not analysing the impact of a rising rupee on the trade and current account deficits. Surely one expects a more analytical stance from such an august body. This apart, measures like tinkering with interest rates on export credits, tweaking duty drawbacks, micromanaging ECB end-use, and so on, would do little to correct the sharply growing deficit. We seem to be going back to the old habits of micromanaging the external sector, avoiding facing the root problem, namely the exchange rate. It did not work then, and is unlikely to work now!

I share similar feelings for EAC for its analysis here. Keep watching this space for more developments.

One Response to “India’s Foreign Trade update: Q1 2007-08”

  1. Dr. R. Shashi Kumar Says:

    I wish to contribute a paper

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