Opinion - Editorials

Current account worries

The merchandise trade data for April 2008 substantiate the Commerce Ministry’s claim that exporters continue to fare well in the face of adversity. The world economy, and with it global trade, have been slowing down. For most of 2007-2008, the rupee was on a strong appreciating trend. Merchandise exporters had their margins squeezed despite incentives and concessions granted by the government. In dollar terms, exports grew by 31.5 per cent in April 2008 over April 20 07: from $10.9 billion to $14.4 billion. In rupee terms, the growth was 25 per cent. The rupee’s more recent depreciating trend will help exporters regain their margins. Notwithstanding the global downturn, the outlook for Indian merchandise exports looks reasonably good for the rest of 2008-09. The problem is that imports have grown by 37 per cent in April 2008 compared with a year ago. Oil imports for the month accounted for $8 billion, out of a total import bill of $24.3 billion. In absolute terms and as a percentage of imports, the oil import burden is bound to increase even more sharply unless there is an against-the-trend cooling of global oil prices. Non-oil imports for April have also grown by over 30 per cent over the previous year. While that indicates economic resilience, the overriding message from the April trade data is not comforting at all: the merchandise trade deficit was close to $10 billion compared with $6.8 billion in April 2007.

A widening trade deficit by itself need not be a cause for worry. Until very recently, invisible earnings comfortably bridged the trade deficit. The size of the current account deficit, even if it was growing, was not a matter of serious concern as long as there was a healthy capital account surplus. For instance, during April-December 2007, as against a trade deficit of $66.5 billion, the invisibles surplus stood at a healthy $50.5 billion. The current account deficit of $16.5 billion was easily bridged by a capital account surplus of $81 billion. However, capital flows, which tend to be volatile, are not only slowing, they are probably reversing themselves. The Indian economy is slowing down. The fiscal situation is deteriorating and corporate earnings are widely expected to be lower. Quite ominously, the growth of software and IT enabled services exports will be slower this year in the wake of the downturn in the U.S economy. The current account deficit is expected to be around 3.5 per cent of GDP by the end of this year. In an exceptional year marked by a general economic slowdown and high oil prices, that will be worrying indeed.

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