Better performance on exports unlikely

Rising crude prices will widen trade deficit

India’s export effort is being hampered by the steady appreciation of the rupee vis-à-vis the US dollar.

During the first six months of 2007-08, exports rose by a mere 5.3%, though in terms of the greenback, the performance was flattering, with the growth rate working out to 18.5%.

Import demand remained keen, due to economic resurgence on a sustained basis. This is reflected in the pace of increase in non-oil imports; they were up by 34.1% in dollar terms and by 19.3% when measured in terms of the rupee.

But, oil imports were tepid, registering a rise of only 8.3% in US currency while they were down by nearly 4% in the Indian rupee.

Overall, imports jumped by 25.5% and 11.7% in dollar and rupee terms respectively during the April-September period of 2007 when compared to a year ago.

The sluggish tempo of oil imports may raise eyebrows but when the underlying data are analysed, this development can be easily explained.

Though the Indian crude basket has been ruling bullish in recent months - approximating to $85 per barrel now - the strident increase occurred began only during the past few months.

During the first half of the current year, for which the foreign trade figures have been just released, the monthly average price of the Indian crude had ruled lower during three months - April, May and August - when compared to the same months of 2006 and were only fractionally higher in two months - in June 200, at $68.19, it was only 1.9% higher than what it was in June 2006 and, again in July 2007, the average price at $72.69 was up by a similar margin.

Only in September 2007, there was an acceleration of sorts in that the crude price jumped to $74.83 from the year-ago level of $60.93.

On balance, therefore, the six-monthly average price of Indian crude was $69.33 this year which was a mere 2.9% more than the similar average for 2006.

Seen in this light, the spurt of only 8.3% in oil imports is understandable. Also, in view of the 11% appreciation of the rupee against the dollar in the first half of the current fiscal in relation the same half of 2006, the negative growth of oil imports (-3.7%) is also easily explained.

Of course, it is almost certain that, the same trend in oil imports is unlikely to be repeated in the second half.

Along with crude prices, Indian crude also is also witnessing a bullish frenzy and in view of the winter months that are ahead, a further upward momentum is on the cards.

If this scenario materialises, India’s trade deficit - already sharply up to $36,294 million in the first half from $26,024 million last year - is slated to shoot up in the October-March 2007 period and hence for 2007-08 as a whole.

As the economy continues to maintain a robust GDP growth, this may also fuel the demand for imports of raw materials and capital equipment. This too will mean that our foreign trade is engulfed in a tide of red ink by the end of March 2008.

With convertible foreign exchange at a record level - more than $ 255 billion as of the last week of October - the anticipated jump in oil imports and therefore in overall imports - can be taken in stride.

With invisible earnings, the current account deficit can be manageable and the overall balance of payments will be comfortable, thanks to the continued brisk pace of capital inflows.

But, a better export effort - which is now stymied by the rupee gaining against the dollar - is intrinsically desirable but which seems unlikely in the current fiscal.