The appreciating rupee has not hurt India’s exports which rose 18% in May to $11.86 billion (Rs48,626 crore), on top of a 23% growth in April. The Indian currency has appreciated 9% against the dollar in the past quarter,making India’s exports more expensive. Imports, too, rose faster by 26.4% to $18.08 billion, resulting in a trade deficit of $6.22 billion that is 46.6% higher than it was in the same period a year ago, according to monthly trade data released by the commerce ministry.
Although economists expect the trade gap to widen, they said it is not yet a matter of concern in view of the rapidly rising capital flows to India, which touched a record $46.2 billion in 2006-07.
“The latest figures reflect a continued strength in exports. True, a strong rupee is a disincentive but the exchange rate is only one of the factors influencing exports,” said Shashank Bhide, senior research counsellor, National Council for Applied Economic Research (NCAER), an economy think tank. According to Bhide, in the past five years, India’s dollar earnings from merchandise exports rose 24% a year even as the rupee appreciated by 1% to the dollar on the back of the country’s rising foreign exchange reserves. “Export earnings did not deteriorate at all but actually rose much faster in this period,” he added.
Owing to a smaller outgo on crude imports, the slowdown in import growth in May was sharp. Imports grew by 26.4% in the month compared with the 40.70% growth recorded in April. Oil imports declined by 3% to $4.74 billion in May, after rising by 11.4% in April.
The pace of growth of non-oil imports, however, showed only a marginal reductionin growth. Compared to 54.3% in April, non-oil imports rose 41.6 % in May to $13.34 billion.
Bhide said “exchange rate appreciation not only makes imports cheaper but can help exporters through a lower rate of inflation, cheaper capital goods imports, and cheaper real interest rates on credit for small-scale exporters.”
A rising trade deficit may help check gains in the rupee as dollar outflows rise to pay for imports. In May, the trade deficit was actually lower than the preceding month, when it had spiked at the level of $7.06 billion, after falling steadily from $5.78 billion in January to $3.80 billion in March.
Rajeev Malik of JP Morgan Chase Bank said the “wider trade deficit will increase the current account deficit, though increase in software exports and remittances from Indians working overseas will limit the impact.” A higher current account deficit, he added, wouldn’t be a problem as capital flows, especially from FDI, ere expected to remain strong this year too. FDI inflows into India were a record $19.5 billion in 2006-07.