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Significant trends in external sector financial scene

The Reserve Bank of India’s data on balance of payments is an important source for identifying significant trends in the external sector. The latest figures cover the period April 1 to September 2007 — the first half of fiscal 2007-08 — and show that while both merchandise exports and imports have grown as compared to the same period a year ago, the rates of increase have been lower.

Merchandise exports grew by 19.9 per cent this year as compared to 24.7 per cent and imports by 21.9 per cent, 2.8 percentage points lower.

It is not the apparent slight deceleration in India’s international trade as much as the causes behind it that are of immediate relevance.

The slowdown in export growth is attributed to the strong rupee. According to the Government, the decline was noticeable in textiles and textile products as well as in agricultural products, engineering goods and chemicals. Some of these are labour intensive and the slowdown has apparently affected these to the point of closure of a few units and job losses.

That is why the strong rupee has also become a political issue. Exporters were presented with a package of sops but there is clamour for more.

The slower import growth is the result of a sharply lower petroleum bill. Oil imports increased by just 15.7 per cent compared to 41 per cent in the first half of 2006-07. While a more detailed analysis is called for, global oil was ruling at much lower levels than now.

The cost of India’s basket of imported crude had moved up to $69.2 a barrel, just $2 more than in the previous period.

This is a far cry from the present level near $100 a barrel. However, non-oil imports showed a big increase on a year-on-year basis, 34.8 per cent compared to 9.8 per cent a year ago.

Here again a more detailed analysis is called for. Non-oil imports covered items which went into exports. A dearer rupee means that these items cost less.

Exports based on these imports (of raw materials/semi-finished goods), therefore, get an advantage. But as a general rule, higher non-oil imports correlate with buoyant manufacturing activities.

The merchandise deficit has widened consequent on the deceleration in merchandise exports and the higher level of non-oil imports. The estimate for the first six months of 2007-08 is $42.4 billion, up by $8.7 billion from a year ago. More worrisome is the deceleration in invisible receipts from 31 per cent in April-September a year ago to 24 per cent this year.

Of particular concern is the deceleration in exports of software and business services.

The rupee appreciation’s impact is seen here too. Leading software companies have been reporting lower margins in their quarterly statements. Software receipts showed a slower growth of 15.2 per cent as compared to more than 37 per cent last year.

Remittances from overseas Indians have been high growth areas in the past and, as part of ‘invisibles’, have helped prop up the current account. And, remittances from Indians working abroad have not only remained consistent, they were more than 49 per cent higher in the first half of 2007 than a year ago. Private remittances have so far been of the order of $19 billion this year.

That along with higher interest income on reserves and a relatively modest rise in business services have contributed to the invisibles surplus remaining higher at $31.7 billion ($23.4 billion last year) despite the deceleration in software exports.

However, the current account deficit for thr the first half widened marginally to $10.7 billion from $10.3 billion last year.

For all quarters since January-March 2006, except October-December 2006 and January- March 2007, the current account has shown a debit balance.

It is the surplus in the capital account made up of net capital flows that has propped up the BoP once again. Under practically all heads — net FDI flows, portfolio investment, external commercial borrowings, other banking capital — there has been an increase. Outward FDI flows also went up as many Indian companies went on an acquisition spree abroad.

Portfolio management flows recorded very strong growth ($18.3 billion versus $1.64 billion a year ago). Such large inflows have been at the centre of major policy debates concerning the exchange rate, domestic liquidity and the management of external reserves.

The SEBI moves to rein in certain forms of FII inflows (participatory notes) came later and their effect can be measured only when the BoP data for subsequent periods come in.

However, the category of external commercial borrowings has grown — they are double the previous year’s figure — despite some strong disincentives. The only category that showed negative growth was NRI deposits, reflecting the deliberately planned lower interest rates during this period.

C. R. L. NARASIMHAN

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