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Resilience amidst a few worries

Balance of payments data for 2006-07 released recently by the RBI show that certain broad trends in evidence over the recent past have become more pronounced. The merchandise trade deficit has widened to $64.9 billion from $51.8 billion in 2005-06. At current levels, it is at 7.1 per cent of the GDP. Merchandise exports grew by 20.9 per cent, marginally lower than the 23.4 per cent recorded in 2005-06. Import growth too was moderated: at 22.3 per cent compared to 32 per ce nt the previous year. There was a jump in non-oil imports comprising primarily capital goods and minerals, scrap, and gold and silver. The oil import bill dropped, even if slightly, because of lower global prices. Conforming to the recent trend, earnings from “invisibles,” including software exports and remittances, propped up the current account receipts. The rate of growth of this category was 29.1 per cent. A spurt in invisible receipts, coupled with a lower oil import bill during the last three months of 2006-07, contributed to a surplus in the current account for that quarter. However beyond reducing the size of current account deficit for the entire year, which now stands at 1.1 per cent of the GDP, there is no special significance to the turnaround in one quarter. Incidentally a reasonable level of current account deficit is considered manageable for a capital starved economy. The current account deficit, which mirrors capital flows, is now well below the level generally forecast — 1.4 per cent, or even higher.

Indications are that the trade deficit will widen further in the days to come. Global oil prices are on the ascendant once again and there is very little possibility of their softening soon. The sharp appreciation in the rupee’s external value since March-April this year has started having its impact on export competitiveness. Even services exports may yield less in rupee terms. Non-oil imports are expected to grow at a robust pace reflecting the strong investment and manufacturing activities that are further corroborated by the buoyant capital inflows. The net capital flows nearly doubled to $44.9 billion during 2006-07 from $23.4 billion in the previous year. A spurt in debt-creating external commercial borrowings as well as non-resident Indian deposits could become a source of worry, while the jump in outward foreign direct investment reflects positively on the globalisation drive of some Indian companies. As in the most recent past, the BOP data show the external economy in a good light even as they point to some lurking challenges.

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