World - Vigil on balance of payments

The fall in merchandise exports during October has been interpreted as a manifestation of the global economic slowdown. It is for the first time in seven years that exports have come down during a month. Severe demand contraction in the developed economies, especially the United States and the Euro Zone, has inevitably led to a fall in their imports. India is much less dependent on exports than, say, China or Korea. However, the sharp deceleration since September has a greater significance than what is apparent from trade figures. Merchandise exports during October 2008 at $12.82 billion were 12 per cent lower in dollar terms than a year ago. It is not much consolation that exports when reckoned in rupees have grown by 8.2 per cent during the same period. For a variety of reasons, Indian exporters have not benefited from the recent sharp depreciation of the rupee in relation to the dollar. Between September and November the rupee went down from Rs.44 to Rs.50 to the dollar.

Conventional correctives such as a favourable exchange rate are obviously not effective when the developed world has gone into a recession. India’s imports have seen a modest growth of 10.6 per cent during October. The petroleum import bill has been decreasing: India’s average crude basket is around a third of its peak level of $142 a barrel on July 3. It is important to recognise that oil prices have fallen due to weak demand from a rapidly stalling global economy. Non-oil imports have grown by just 5.5 per cent in October. Weak commodity prices are one reason but the slowdown in capital goods imports is another sure sign of slackness in the Indian economy. During the first six months of the year, the trade deficit has widened to $73 billion from $46 billion a year ago. Quite ominously, earnings from software exports and workers’ remittances are unlikely to be as robust as they have been over the past few years. The current account deficit is bound to be a cause for worry as capital flows are reversing this year. Utmost vigil is called for in monitoring the balance of payments situation.