Gaphic: Ahmed Raza Khan/Mint

Gaphic: Ahmed Raza Khan/Mint

Trade deficit narrows to lowest level since April as import growth slows

Trade deficit narrows to lowest level since April as import growth slows

New Delhi: The rising rupee has been a growing worry for Indian exporters, who fear that their goods will be priced out of a global economy in which many countries are busy in a war of competitive devaluations.

New trade data released by the government on Monday should assuage some of these fears.

Exports continued to grow smartly in September while import growth slowed, as a result of which the trade deficit shrunk to its lowest level since April, coming in at $9.12 billion (Rs 40,492.80 crore).

However, the slowdown in imports could, in case it continues in the coming months, be an indication that the Indian economy is losing some steam.

In September, exports grew 23.2% to $18.02 billion while imports rose 26.1% to $27.14 billion, according to data released by commerce secretary Rahul Khullar on Monday. A confident commerce and industry minister Anand Sharma said that India is likely to meet its annual export target of $200 billion for the current fiscal.

Gaphic: Ahmed Raza Khan/Mint

Khullar said the size of the trade deficit continues to be a concern, though it does not warrant alarm bells as yet.

He added that India’s current account deficit—the widest measure of external imbalances—would be manageable if it remains within 2.5-3% of gross domestic product, or GDP.

The economic advisory council (EAC) to the Prime Minister has projected a current account deficit of 2.7% of GDP in 2010-11.

EAC’s economic outlook for the current fiscal said capital inflows of $73 billion would be adequate to finance the large current account deficit.

The Reserve Bank of India in its mid-quarter monetary policy review in September echoed similar sentiments: “The apparent stabilization in advanced economies visible over the past few weeks appears to have improved global investor sentiment, resulting in a steady increase in capital inflows into emerging market economies, including India. If this trend continues, the risks on the external front will clearly abate despite exports remaining sluggish."

India’s exports have shown positive growth since October, while imports have recovered sharply and registered positive growth since November.

During the first six months of the current fiscal, exports grew 27.6% to $103.3 billion while imports increased 29.9% to $166.5 billion, leading to a trade deficit of $63.2 billion.

RBI said in its policy review that the continuing sluggishness of the global economy constrains exports growth while the strong domestic recovery has increased demand for imports. “As a result, the trade deficit and with it the current account deficit are widening."

Exports picked up due to recovery in sectors such as gems and jewellery and engineering during September, while sectors such as iron ore, electronics and electrical items, man-made fibre, handicrafts are yet to come out of the slump.

“In the third quarter (October-December), exports usually pick up compared to the previous two quarters due to the festive season demand," Yes Bank Ltd chief economist Shubhada Rao said.

However, she added that one need to watch carefully whether the momentum in exports growth could be sustained given the strengthening rupee.

As far as imports go, while petroleum imports rose 14.9% along with vegetable oil, jewellery and machinery products in September, fertilizer imports contracted 44%.

Rao also said too much should not be read into the marginal slowdown in imports. “(Domestic) demand is there. Rupee appreciation will also support imports. However, we could see some softening because lot of imports may have been booked at a stronger rupee," she added.

Asked how the rupee appreciation will affect India’s merchandise exports, Sharma said: “We do not see a stage where the rupee can be termed volatile."

Khullar added that the rise in nominal exchange rate will impact exports only with a lag. The rupee has appreciated 4.5% this year against the dollar.