Monday, September 8, 2008

Performance of India's External Sector during 2007-08

The external sector of the Indian economy has progressed well during 2007-08 on the whole. As per the information from the Reserve Bank of India (RBI), exports reached US $ 159 billion during 2007-08 from US $ 128 billion during the same period in 2006-07 recording an impressive growth of 23.7%. However, imports too have increased to US $ 249 billion in 2007-08 from US $ 191 billion in 2006-07, thus leading to a trade deficit amounting to US $ 90 billion during 2007-08. This was compensated by large inflows of receipts from services exports and private transfers that led to a relatively comfortable current account deficit of 1.49% of gross domestic product (GDP) during the year.

The major items that India exported during the year 2007-08 are agriculture and allied products, ores and minerals, manufactured goods and petroleum, crude and products, and their share in the total exports are 11.36%, 5.66%, 63.58% 9.39% and 15.64%, respectively. On detailed examination it is seen that growth in exports has largely been in primary products like sugar (95%), rice (87%), oil meal (62.4 %), spices (49%) and iron ore (47 %). In fact, the share of agriculture and allied activities in total exports has seen a marginal rise from 10.04 % in 2006-07 to 11.36 % in 2007-08. Engineering exports, which account for 35% of manufactured exports of India, actually saw a dip in growth rate from 36% in FY 2007 to 24% in FY2008, which is a matter of concern since this can be occurring as a result of falling demand in the backdrop of global slowdown and economic recession in the US. Among the total exports, Agriculture & Allied products export increased by 42.46%, Petroleum Crude and Petro-products by 33.3%, Ores & Minerals by 28.75%, and Manufacturing Goods by 19.19%, over the previous year. Destination-wise, although the US remained the principal export market, its share declined to 13.0 per cent during 2007-08 from 14.9 per cent in the previous year. The other major destinations were the UAE (9.7 per cent), China (6.8 per cent), Singapore (4.3 per cent), and the UK (4.1 per cent). During 2007-08, India’s exports to the EU, North America, Eastern Europe and Asian developing countries showed an accelerated growth, while that to OPEC, African developing countries and Latin American developing countries showed deceleration.

According to the World Economic Outlook released in July 2008, the growing use of export restrictions by food exporting countries (which includes India too) to raise domestic food supplies and lower domestic prices for ensuring food security has put pressure on world prices. Export restrictions by some major rice exporting countries have contributed substantially to the run-up in rice prices in 2008.

The trend in growth in invisible receipts continued with 26.2 per cent during 2007-08, which was broadly comparable with that of 28.3 per cent in 2006-07, mainly due to the momentum maintained in the growth of software services exports, travel, transportation, along with the steady inflow of remittances from overseas Indians. However, appreciation of the value of Indian rupee vis-à-vis US dollar from Rs. 45.22 in 2006-07 to Rs. 40.18 in 2007-08 raised apprehensions that it might adversely affect India’s software and the business process outsourcing (BPO) industry.

The major items, which India imported during the year 2007-08 are petroleum and petro products, bulk consumption goods, capital goods, textiles, chemicals & related products and gold and silver, and their share in the total imports are 33.38%, 2.22%, 15.63%, 1.03%, 7.81% and 7.47%, respectively. India saw the import bill for petroleum and petro-products rising to US $ 79.6 billion in 2007-08 from US $ 57.1 billion in 2006-07 owing to rising international crude prices.

The value of total trade in goods and services as percentage of GDP at market price declined to 45.8% in 2007-08 from 47.2% in 2006-07. The value of merchandise trade deficit during 2006-07 was US $ 64.9 billion, which rose to a level of US $ 90.1 billion in 2007-08. The trade deficit on non-oil account during 2007-08 amounted to US $ 25.9 billion against US $ 20.9 billion in the previous year.

As per the World Economic Outlook released in September 2007, world trade volume had been projected to increase by 7.4% in 2008. Although the latest estimates released in July 2008 show that global real GDP growth on a purchasing power parity basis is expected to decelerate from 5.0 percent in 2007 to 4.1 percent in 2008 and further to 3.9 percent in 2009, which can adversely affect India’s trade performance in 2008-09. Foreign direct investment (FDI) in India has increased from US $ 22.1 billion in 2006-07 to US $ 32.4 billion in 2007-08. Portfolio investment has increased from US $ 7003 in 2006-07 to US $ 29385 in 2007-08. The net capital inflows rose substantially to US $ 25.4 billion in Q4 of 2007-08 from US $ 15.6 billion in Q4 of 2006-07. The major sources of capital inflows were external commercial borrowings (ECBs), foreign direct investment (FDI), short-term trade credit and overseas borrowings by the banks. The share of ECBs in the total external debt increased from 4.54% in 2007 to 5.29% in 2008. Total external debt as percentage to gross domestic product (GDP) increased from 18.50% in March 2007 to 18.86% in March 2008. Short-term external debt as percentage to GDP increased from 2.88% in March 2007 to 3.78% in March 2008. Long-term external debt as percentage to GDP reduced from 15.63% in March 2007 to 15.08% in March 2008. Capital account balance as a percentage of GDP increased from 4.99 % in March 2006-07 to 9.21% in March 2007-08. The foreign exchange reserves of India increased to US $ 309 billion in 2007-08 from US $ 199 billion in 2006-07.
Note: This note has been prepared jointly by Shambhu Ghatak and Dr. Archana S Mathur

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