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External Sector: Improving trend… - Views on News from Equitymaster
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  • Feb 24, 2001

    External Sector: Improving trend…

    The external environment improved with world GDP (Gross domestic Product) growth rates increasing to 4.7% in 2000 from 3.4% in 1999. World GDP growth has been increasing for the past three years.

    The buoyant growth in 2000 was largely due to the strength in the US economy during this period. The US GDP grew by 5.2% over the concerned period (4.2% in 1999). Improvement in the economic growth of Europe and Japan also added to the rise in global GDP growth rate. Consequently, growth in world trade volumes almost doubled from 5.1% in 1999 to 10% in 2000. The current year, however, could see a decline in world trade as the US economy heads towards a slowdown (GDP growth 3.2%) despite sustenance in the European and Japanese economies.

    Indian exports, over the last three years, have been picking up and recorded a growth of 25% for the period April '00 - October '00. Imports in this period increased by 18%, with oil imports being the largest contributor. The higher POL imports were the offshoot of the recent oil shock. If we adjust for oil imports, the non-POL imports reported a negative growth of 8.3% in the first nine months of the current fiscal. This has reduced the pressure on the current account deficit.

    Comparing the post liberalization period with a ten-year period preceding liberalization, India has shown marked improvement in its external environment. Exports cover of imports, which was 62% between '81-'92 increased to 74% post liberalization. The ratio of exports and imports to GDP increased from 13.2% to 19.9% over the concerned periods. From the precarious levels of 2 months import cover India's foreign exchange reserves have increased to 8 months of import cover.

    % of GDP
    Items of BoP 1981-92 1993-00
    Imports 8.2 11.5
    Exports 5.1 8.4
    Trade Balance -3.1 -3.1
    Invisibles 1.2 1.9
    Current account balance -1.9 -1.2
    External debt 31.4 27.9
    Debt service payments 2.8 3.0

    Transforming from an inward oriented economy to a more open and liberalized economy has facilitated in strengthening India's economy. This is vindicated by the fact that India stood unscathed by the Asian financial meltdown in '98-'99. Further, the Indian economy overcame other challenges like imposition of sanctions in 1998 and the very recent oil shock with oil prices rocketing to $35 per barrel.

    Indication of sustained improvement in the sector is also reflected in the debt servicing as a percent of receipts. This percentage has declined from 35.3% in FY91 to 16% in FY00. Besides higher revenue receipts the decline in percentage is also due to a shift in the nature of foreign investments, which have moved towards non-debt investments. The shift has also impacted the profile of BoP in the capital account.

    The buoyant rise in exports is also an indication of the increased competitiveness of India's exports vis-à-vis its Asian counterparts. However, the lower non-POL imports could indicate a slowdown in industrial activity. With demand in suspect, the industrial output is being targeted to the export markets, which could be the reason for the higher exports in the current fiscal.

    The Government should aim at further strengthening India's external sector, as the shocks faced by the country have been largely external in nature. Strengthening the Indian economy along with the external sector will only increase the resilience and reduce the risk of any negative fallouts form future crisis. This should also boost the sentiments of foreign investments making India an attractive destination.



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