By TIOL News Service
NEW DELHI, Feb 27, 2006 : IT is not the escalating current account deficit and rapidly growing imports that are worrying the Indian economy. The Economic Survey observes that the islands of worry are inflation, interest rate and fiscal deficits. The Survey tabled today points out that current account surplus is nothing but it is an indicator of unsatisfactory investment. The survey also suggests that a higher investment will result in higher growth in imports of basic, intermediate and capital goods along with pushing the trade and current account deficit.
Further the survey adds that the deficit created will not balance the payments problem as other imports (except oil, gold and silver) is somewhat prejudiced for capital and some other essential inputs. And this entire chain will in fact push the growth rate of exports.
Also, the recently concluded agreements with North-East Asian countries like Singapore and Thailand are expected to enlarge opportunities for Indian exports in the near future. And all such prospects appear to be robust as more manufacturing exports will add greater value to the export basket which already has a leading edge in services.
The Economic Survey cautions that the rate of growth of trade deficit may slow down, if the export related imports absorbed by the economy so far, starts to yield rapid growth of exports in the coming months. At this point county’s external trade, including services, grew by 41.5 % in the first half of 2005-06, with value of such trade at US $ 163 billion (as compared to 44.2 per cent to US $ 268 billion in 2004-05). What is noticeable here is that the trade in services has been growing faster than merchandise trade In fact the share of services in total trade increased from 23.5 % in 2003-04 to 29.1 % in 2004-05 and further to 34.4 % in the first half of 2005-06. Meanwhile, on the other hand the continued rise in the net invisibles was not enough to neutralise the rapidly expanding trade deficit that is US $ 31.6 billion during April-September 2005-06. And if the domestic industry continues to remain up beat, then only the sustained industrial demand for imports may increase the size of the deficit in the remaining months of 2005-06.
The survey also points out that the current account deficit this year has reached to US $ 13 billion during April-September, which is much larger than what it was in 2004-05. This emerging growth is sign of excessive inflow of external capital, which is only supporting higher investment on savings. In 2004-05 the turnaround in current account was complimented by a significant increase in the capital account reserves. And when it comes to the first two quarters of 2005 the capital accounts surplus almost doubled in size to reach US $ 12.9 billion in September 2005. The growth of capital account was mainly by way of foreign investment inflows.
As far as the foreign investment is concerned it was much-much higher than what it was in 2004-05. The figures of US $ 7.4 billion for foreign investment inflow is as much as US $ 5 billion higher than what it was in the first half of 2004-05. Within this category foreign institutional investor (FII) was the most dominant one with a handsome figures of US $ 4.2 billion during April-September 2005 (this figure is even more than the figure of net FDI inflow which was only US $ 2.3 billion. However the FDI too was not that bad as it seems and it to grew by 36% in 2004-05, which was marginally improved to US $ 3.2 billion as compared to US $ 3 billion in the corresponding period (April-September) of 2004.
Meanwhile, India’s total foreign exchange reserves were US $ 28.5 billion higher (at US $ 141.5 billion) than what it was in March 2004. However, because of redemption of India Millennium Deposits in January this year it declined to US $ 139.2 billion.
Complimenting the other growth factors, India’s merchandise exports have been recording an annual growth rate of more than 20% since 2002-03. And the main reason for this growth is basically because of exports of gems-jewellery, engineering goods, ores, minerals and chemicals along with petroleum products. The figures of April-January 2005-06, shows that exports reached at US $ 74.9 billion (growth rate of 18.9%) easily achieve its target of US $ 92 billion for 2005-06.
Meanwhile amid growth-rate in exports there was a substantial change in Merchandise imports-rate, which is in a southward journey by recording 26.7% during April-January 2005-06 (in 2004-05 the Merchandise imports grew by 39.7%). However its worth noting that though the rate has come down but still it is as high as 26% and it is attributed to the sharp rise in global crude prices, which accounted for an increase in petroleum, oil and lubricant imports by 46.9 % during April-January 2005-06. Also the non-oil, non-bullion imports complimented the figures, which increased by 30.8% during April-October 2005.
