New Delhi: India’s services exports have started to shrink, on top of declining demand in the overseas markets for its merchandise in the face of recession in Europe and faltering economic recovery in the US, reinforcing concerns about the government’s ability to bridge the widening current account deficit.
Net services exports shrank 7.6% to $28 billion in the first half of the fiscal (April-September), data released by the Reserve Bank of India (RBI) on Thursday show. The merchandise trade deficit widened to $48 billion during the same period, from $40.4 billion in the year-ago period, as exports fell and imports rose.
India runs up a deficit with the rest of the world in merchandise trade in most fiscal years, with the gap being partially met by a surplus in services trade. The declining net services exports and a widening merchandise trade deficit pose a new challenge for the government, which is struggling to boost slowing economic growth.
In the year ended 31 March, the trade deficit, mostly the outcome of an increase in gold imports, led to a current account deficit equal to 4.2% of the country’s gross domestic product (GDP).
RBI, in a note published on 12 November, said the falling merchandise exports, coupled with the declining surplus in services trade over the medium term, is likely to leave the current account deficit too wide for comfort.
The current account deficit “financing pressures can re-emerge in the face of event risks, although the recent policy measures announced by the government have helped boost portfolio inflows for now,” RBI said.
Finance minister P. Chidambaram said recently that the government hopes the current account deficit will fall to 3.7% of GDP this fiscal. He said a substantial part of the $70.3 billion required to finance the deficit will be met through foreign direct investments, foreign institutional investments and external commercial borrowings.
Services exports won’t provide any help in narrowing the trade deficit at a time when merchandise exports are also contracting, said Madan Sabnavis, chief economist at CARE Ratings.
Sabnavis, however, expects the deficit to remain below 4% of GDP in 2012-13.
India’s services exports range from information technology (IT) to services provided by Indian doctors and nurses abroad. RBI’s classification of service exports includes transport, travel, construction, insurance and pensions, financial services, telecommunications, computer and information services, and personal, cultural and recreational services.
Services are critical to India’s economic well-being as they constitute more than half the country’s GDP. The share of services in the GDP has risen from 33.5% in 1950-51 to 56.3% in 2011-12.
In terms of size, software is a key category, accounting for 41.7% of the total services exports in 2010-11.
The Economic Survey for 2011-12 said the outlook for the services sector in the domestic economy is linked to its prospects externally.
“While software services exports have continued to be steady, the unfolding events in the euro area could lead to some sluggishness in this sector,” it said. “The fair-weather business services exports, which have already shown signs of deceleration, may not get better.”
While the commerce ministry regularly updates its foreign trade policy and sets yearly targets for merchandise export growth, forecasts for the services sector or measures to boost its exports are a rarity.
According to the World Trade Organization, India ranked sixth in exports of commercial services in 2011 with a 3.6% global share. In services imports, it ranked seventh with a 3.4% global share.
In contrast, India ranked 19th for its share of merchandise exports, contributing 1.6%; it ranked 13th in its share of merchandise imports with 2.5%.
RBI, in its annual report released in August, cautioned that the falling comfort level from services exports means that current account deficit risks will persist this year.
“Software exports are likely to moderate as global IT spending is expected to be lower. Major software exporters have already made steep downward revisions in their guidance on expected revenue during the year,” the central bank said.