New Delhi: A strong rebound in domestic demand and weak overseas markets have raised concern that India would end the fiscal year to next March with a record trade deficit as imports expand at a faster pace than exports.
Merchandise exports grew 22.5% in August, while imports increased by 32.2%, according to data released by commerce secretary Rahul Khullar on Wednesday.
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Trade deficit in the month stood at $13 billion (Rs 60,320 crore), taking the total since April to $56.6 billion.
Khullar said trade deficit may touch $135 billion in this fiscal year, leading to a current account deficit (CAD) worth 2.5-3.5% of gross domestic product (GDP).
“We are concerned about the size of the balance of trade. Trade deficit will be larger than earlier anticipated. However, it can still be financed,” he said.
The overall merchandise trade deficit in 2009-10 was $108 billion, down from $118 billion in 2008-09. CAD expanded to 2.9% of GDP in 2009-10 from 2.4% in 2008-09.
“This is primarily due to a setback in external demand,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy. “Imports are rising because domestic industry is increasing capacity, which is reflected in the high growth in capital goods.”
Factory output data showed capital goods in July rose 63% over the same month a year ago.
Bhanumurthy said CAD won’t be so high next year. “Even this year, we have a proper cushion in terms of abundant foreign exchange reserves to manage the large CAD.”
India’s foreign exchange reserves rose by $2.5 billion to $285 billion in the week ended 3 September.
In its quarterly macroeconomic report released in July, the Reserve Bank of India said import growth may top export growth as the Indian economy was growing faster than the global economy.
“As a result, possible widening of current account deficit may also require higher net inflows of foreign capital, which could remain volatile in a global market where risk appetite of investors may take some time to recover,” it said.
While foreign institutional investment in India remains volatile this year, foreign direct investment from April-June stood at $5.8 billion, declining 17.22% from the year-ago period.
The economic advisory council (EAC) to the Prime Minister has projected a trade deficit of 2.7% of the GDP in 2010-11 and 2.9% in 2011-12.
EAC’s economic outlook for the current fiscal said capital inflows of $73 billion would be adequate to finance the large CAD, leaving a modest $31 billion to be absorbed by foreign exchange reserves.
EAC also said since capital flows are expected to be moderate, they should not pose a problem to the management of exchange rate. “Exchange rate variations will remain within an acceptable range.”
The rupee ended up at 46.35/36 per dollar on Wednesday compared with its previous close of 46.445/465, boosted by gains in local shares. Losses suffered by other Asian currencies limited further improvement.
Global economic recovery may be slowing at a more alarming rate than previously anticipated, according to the latest interim economic assessment report of the Organisation for Economic Co-operation and Development (OECD), which groups 33 free-market economies.
OECD has projected world trade to grow by 10.5% in 2010 before moderating to about 8.5% in 2011.
India’s exports have shown positive growth since October, while imports have recovered sharply and registered positive growth since November.
In August, sectors such as tea, fruits and vegetables, handicrafts, man-made fibre and cotton yarn saw contraction in exports compared with a year ago. Though overall imports registered robust growth, import of transport equipment shrank by 21% during the month.
“Next month you will see growth over 2008 level,” said Khullar. “We are on target to achieve $200 billion exports this fiscal.”
Reuters contributed to this story.