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Deja vu on the balance of payments front

Print edition : Dec 19, 1998 T+T-

Official inaction in the face of dramatically poor external trade trends may lead to another balance of payments crisis.

THERE have been straws in the wind for some time now, and no one can say that the poor external trade performance of the Indian economy over the past months comes as a complete surprise. Nevertheless, the stark quality of the latest trade figures released by official agencies still imparts a shock. Provi-sional figures put out by the Directorate-General of Commercial Intelli-gence and Statistics (DGCI&S) suggest that exports during April-October 1998 were only $1,887 billion, more than 5 per cent lower than in the same period in 1997. Worse still, export performance has been deteriorating progressively over the current fiscal year, so that dollar exports in October 1998 were 11.63 per cent lower than a year earlier.

This abysmal performance in exports cannot be blamed on the poor world market alone, since world exports are currently estimated to be growing at 4 per cent - a lower rate than in the previous year to be sure, but still a positive increase. Nor can the slump simply be attributed to the major currency depreciation in South-East Asia, since many Indian exports are in non-competing areas. Instead of trying to lay the blame on adverse external conditions, as the Commerce Ministry has done until now, clearly the most urgent tasks for the Government at present are isolating the factors responsible for such a dramatic decline and doing something about them quickly.

The urgency is necessary also because imports show no such decline, and indeed seem to have accelerated in dollar terms. In the first six months of the current fiscal year, imports are estimated to have been as much as $24.76 billion, which is 9.35 per cent more than in the same period of 1997. Since oil imports actually fell by 26 per cent because of the collapse in international oil prices, this indicates an even bigger increase in non-oil im-ports. And so it turns out that non-oil imports in these months increased by 18.71 per cent compared to the same period last year.

This means that the trade deficit for the period April-October 1998 is already around $5.8 billion, more than double that recorded over the same months in the previous year. Given past trends, this suggests that the trade deficit over the current fiscal year may be in excess of $10 billion. And this only refers to trade figures put out by the DGCI&S, based on Customs data. The more comprehensive data put out by the Reserve Bank of India, which include other official and defence imports, have shown much larger trade deficits in the recent past, so that the real trade gap may be very much larger.

WHAT is remarkable is that this increase in imports has occurred at a time when Indian industry continues to be in recession and there has been a notable slump in the market for domestic production. The deceleration in industrial production which began in late 1996 continues to persist, with the index of industrial production showing only a 3.6 per cent growth in the April-September 1998 period compared with the previous year. Within this, the worst performance has been recorded by consumer goods (only a 0.8 per cent increase) with production of durable consumer goods increasing by a barely noticeable 0.4 per cent.

Industrial recessions in post-Independence India have typically been characterised by lower import activity and improved export volumes, as sluggish domestic production translates into lower import demand and domestic manufacturers search for external markets. Currently we have exactly the opposite combination, higher imports and lower exports even as the industrial slump continues - and this in itself is cause for major concern.

It is difficult to analyse the causes behind this without greater knowledge of the commodity and country composition of the trade patterns. But early evidence from the period until September gives some pointers.

In terms of non-oil imports, four sets of commodities have been significant. Edible oil and sugar imports increased substantially, although their share in total imports remained small. Project goods imports also increased, compared to a fall in the previous year.

But the really big increase was in imports of gold and silver, which increased by nearly 300 per cent to $2.5 billion, or nearly 12 per cent of total imports. This is far above anything warranted by the export of gems and jewellery, and reflects the impact of freeing gold imports in a country that John Maynard Keynes once described as "the sink of precious metals". The other substantial increase has been in the miscellaneous category "others", which includes a range of goods whose imports were recently liberalised under the new Exim Policy. Over April-September 1998, such imports hadincreased by more than 50 per cent, to account for nearly 6 per cent of all imports.

Meanwhile, export composition indicates that some of the fall in exports can be traced to commodities such as textiles and leather, which have certainly been affected by the sharp currency depreciation in South-East Asian countries with competing exports in these areas. But the decline in exports is more generalised, being very marked in sectors such as machinery and transport equipment, electronic goods, chemicals and dyes, and a range of other goods in which exports from India were recently growing. This indicates a more serious loss in exporting ability which needs to be dealt with.

THE direction of trade figures tells the same story: while the East Asian crisis does explain some of India's current trade woes, it is by no means the only factor at work. Thus, while exports to Asia show the sharpest decline, there is also a substantial fall in exports to Western Europe, Australia and other regions.

It is hardly recognised, by both media and official circles, that in the 1990s Indian balance of payments has been fundamentally sustained by remittances from workers abroad. This is especially true since 1995, as the return of workers to West Asia led to buoyancy in private transfers from that region, and as the short-term export of software professionals has led to growth in remittances by such workers. Even in the current fiscal year, such private transfers are expected to be around $11.5 billion, which will be absolutely critical in financing the expanding trade gap.

But even such unsung contributions, large as they are, may not be enough to stave off balance of payments problems in the near future. The current account deficit is likely to be between 2.5 and 3 per cent of GDP in the current year, which is certainly enough to lead to greater suspicion on the part of foreign investors. Short-term capital flight - which is now eminently possible - may not lead to the South-East Asian type of financial meltdown in India, but it can still lead to an economic crisis of serious proportions.