India’s trade deficit is a huge worry—and it is likely to worsen if oil prices continue to climb up. The deficit in April was a tad below $10 billion. And, it is very likely to widen in May. Meanwhile, foreign inflows into the stock market have been weak. It’s no wonder then that the rupee is falling against the US dollar.
The strong rupee and the weakening global economy seem to have done little harm to exports. They were 31.5% higher in dollar terms from their level in April 2007.
Oil has done most of the damage. Imports other than oil have grown at around the same rate as exports. But, oil imports have soared. They were 46.2% higher than a year ago. Most of the recent deterioration in the trade balance is explained by the rise in global oil prices.
What of the future? It is likely that the trade deficit for 2008-09 will top the $125 billion mark, or around 10% of GDP. That’s scary. Few countries can painlessly manage trade deficits of this magnitude. We may not be stumbling into a crisis. But it is time to be prepared.