The Hindu : Opinion / Editorials : Trade, foreign inflows and the rupee

Online edition of India's National Newspaper
Wednesday, May 11, 2005

Opinion

Opinion - Editorials

Trade, foreign inflows and the rupee

Recent Commerce Ministry trade statistics confirm the trends discussed in the Reserve Bank of India's new credit policy. During fiscal 2004-05 despite an impressive 24.4 per cent growth in exports (to touch nearly $ 80 billion) the trade deficit widened sharply to $ 26.5 billion as against $ 14.2 billion the previous year. Imports have surged to $ 106 billion, an increase of 35.6 per cent over 2003-04. Predictably the high international crude prices caused the oil import bill for last year to go up to over $ 29 billion, from $ 20.60 billion during 2003-04 but what is noteworthy is that non-oil imports too grew sharply to over $ 77 billion. The surge in non-oil imports has been interpreted as a positive sign for the ongoing industrial recovery but a more disaggregated picture is needed to establish a firm correlation between imports and specific areas of growth. Export growth has been broad based with primary products showing an increase of 24.7 per cent and manufactured goods expanding by 22.1 per cent.

The latest data need to be viewed from the perspective of the external sector as a whole. Often understated is the crucial role played by "invisibles", primarily software receipts and private transfers in balancing the current account. The current account of the balance of payments (BoP) went into a deficit during April-December 2004 after having been in surplus consecutively over the previous three years. Widening trade imbalance, the primary cause, was substantially offset by net invisible receipts of $ 21 billion. Thus, it is the increase in capital inflows that more than offset the current account deficit. Complete BoP data for the whole of last year, when available, may well confirm these trends. While software exports have been growing robustly, there have been some doubts on whether the growth in private transfers, essentially remittances from overseas Indians, will be sustained.

That brings into focus the challenges before the exchange rate policy. A cheaper rupee has always been on the exporters' wish list. A number of factors seem to favour it at this juncture. Since inward remittances cannot be taken for granted, there is a case for advocating this traditional form of export promotion. The rupee's recent strengths have been fuelled in part by the record capital flows into the stock market. The abundance of dollars has brought in its wake certain monetary management issues related to the prevention of a rapid appreciation of the home currency. The RBI has been mopping up dollars and releasing rupees that will then have to be sterilised to prevent a runaway increase in domestic liquidity. The argument is that without these inflows the rupee would be much cheaper in dollar terms. Studies based on the Real Effective Exchange Rate Index suggest that the rupee will be seen to be overvalued when the index becomes broad based to include currencies of major trading nations, notably China. However, trade data by themselves can provide only a partial guide to exchange rate policies.

Printer friendly page
Send this article to Friends by E-Mail

Opinion