iconimg Tuesday, September 01, 2015

Sagar Kanade
New Delhi, January 13, 2013
At the beginning of the New Year, the finance minister released a statement on the widening current account deficit (CAD) outlining the cause. The statement came at the backdrop of data released by the RBI on India’s balance of payments for the second quarter, indicating an unprecedented surge in CAD to 5.4% of GDP. Such high CAD in an economy already grappling with issues of slowdown of growth, fiscal consolidation and persistent high inflation, does not portray a healthy picture.

At the core of the problem for the current year is the burgeoning trade deficit. During April to November 2012, both exports ($186.86 billion) and imports ($321.18 billion) have declined. However, with a sharper drop in exports (7.0%) than imports (0.8%), the trade deficit has surged to $134.32 billion in the first eight months, against $122.66 billion a year ago. Major decline in exports growth has come in sectors of petroleum and oil products,engineering goods, gems and jewellery, textiles and electronic goods, which seem to be significantly affected by sluggish global demand and the uncertain macroeconomic environment.

In October 2012, the World Economic Outlook projected world trade volume to grow at 3.2% in 2012. It had grown by 12.6% in 2010 and 5.8% in 2011, clearly showing a drop in global demand. On the import side, the decline in non-oil imports is largely set off by robust growth in petroleum, oil and lubricants (POL) imports, contributing almost 35% of total imports.

One of the causes for the rupee depreciating against the dollar and the euro in 2011-12 was the widening CAD. Unfortunately, this trend has continued in 2012-13 as the rupee further depreciated to 54.78 per dollar and 72.26 per euro by December 31. 

Depreciation of any currency usually offers an incentive for exporters to reap benefits of higher realisation from foreign inflows and a discouragement to importers as they need to pay more in local currency, ultimately resulting in higher exports and lower imports. However, that does not seem to be the case with India.

Certain goods in India’s import basket are inelastic, implying that in spite of unfavourable currency rates, the demand and need outweigh any possible decline in purchases due to higher price.

Relative demand inelasticity contributed to maintaining the level of Indian imports, whereas the fragile economic climate in the euro zone and the continuing fiscal problems in the US adversely affected exports.
Had our exports to the euro zone and major Asian destinations, which usually contribute to more than 40% of total exports, grown at the same pace as last year, the impact in Rupee terms would have been substantial.

Despite recent rise in foreign exchange inflows easing pressure on the rupee, there are no real signs of a sizable rupee appreciation in the near future. This presents an opportunity for elevating exports and giving a timely boost to the economy.
The government has announced several schemes for exporters and is also in the process of expanding trade agreements. But the impending budget may be the right time to push harder on implementing exports reforms and significantly boost the export sector by making India’s products more price-competitive in the dwindling world market.

Also, reducing the over-reliance on developed economies for exports by diversifying export markets mainly towards emerging nations will help export growth in the long run.

Policy actions taken now will determine how the trade trajectory develops and ultimately on whether such actions will proactively assist in reducing the burgeoning CAD.

(The writer is with Deloitte Touche Tohmatsu India Pvt Ltd)