External Sector: The gap narrows - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

External Sector: The gap narrows

Feb 26, 2002

Although the external environment deteriorated in FY01, India's current account balance reported an improved. This was primarily due to improved growth in exports, lower imports and continued buoyancy in invisible receipts. That said, all is not to cheer about, the lower imports was largely due to slower domestic economic growth.

India: Among the toppers…
World GDP3.6%4.7%2.4%
The external environment -- world GDP -- experienced rising growth over 1999 and 2000, as the global economy recovered from the aftermath of the Asian crisis followed by the global financial meltdown. World output grew impressively, as the tech wave took over the globe leading to higher corporate investments and private consumption. But bursting of the tech bubble in the U.S, over 2000-01, spread not only to other sectors but rest of the globe. Consequently, world GDP growth declined to an estimated 2.4% in 2001. China is likely to be the only Asian country to register strong growth in 2001 backed by the ongoing reform process.

The slowdown in global GDP growth rates has led to a sharp decline in international trade. Global trade, which grew in double digits (12.4%) over 2000, has registered a dramatic fall to an estimated 1% in 2001. Consequently, the impact of depressed international trade will to be reflected on India's trade accounts in fiscal 2002.

On the trade front, India's exports continued to report robust growth in FY01. Exports in dollar terms, followed up a 9.5% YoY growth in FY00 with a 19.5% growth in FY01. The growth indicates the recovery in exports over the past two fiscals. Between FY97 and FY99 domestic exports stagnated, which could largely be due to the Asian crisis. The sharp slide in East Asian currencies increased the price competitiveness of these regions vis-à-vis other nations, which could have added to the woes of the domestic export sector. Software exports drove higher growth in the past two years.

The trade balance (exports less imports) has improved considerably over the past year. The excess of imports over exports, which was $17.8 bn in FY00 declined to $14.3 bn in FY01. This is largely due to the twin effects mentioned earlier of improved export growth coupled with lower growth in imports. Growths in imports have been reverse to that of exports in the past two years growing by 16.5% and 7% respectively. The jump in imports for FY00 was primarily due to heating up of international oil markets with prices spiraling from $13/ barrel to an estimated $26/ barrel. Oil imports during this period doubled to $12.6 bn. While oil prices continued to strengthen through FY01, the incremental rise was not as large. Also, non-oil imports reported slower growth with industry showing signs of weakening. These factors resulted in lower import growth for FY01. In fact, non-oil, non-gold imports registered negative growth in FY01. The drop in imports, to an extent, also allays fears that liberalization would result in cheaper imports flooding domestic markets. Industry needs to consider the continuous depreciation in the Rupee, which is providing a natural buffer to domestic businesses.

On the current account, although invisibles have registered a decline in FY01, buoyancy in private transfers has helped stall the slide. As a result of these factors, India's current account deficit, expressed as percentage of GDP, fell from 1.1% to 0.5% over the concerned period.

CAD: The gap narrows
(Rs m)FY99FY00FY01
Exports 34,298 37,542 44,894
Imports 47,544 55,383 59,264
Oil 6,399 12,611 15,650
Trade Balance (13,246) (17,841) (14,370)
Invisibles 9,208 13,143 11,791
CAD* (4,038) (4,698) (2,579)
*Current account deficit
Despite the lower current account deficit, the balance of payments (BoP) came under pressure in FY01. This is due to pressure on capital flows. In the first half of FY01, interest rates in the U.S and across the developed countries were on a rise, which could have dampened capital flows in the country. Foreign investments, including FDI, FII and others, declined by $0.5 bn compared to the previous year. A bigger hit of $2 bn includes, among other things, deferred export receipts unlikely to accrue, which have been accounted for earlier. The pressure on BoP was reduced with the State Bank of India issuing the India Millennium Deposit (IMD), which raised $5.5 bn. The higher borrowings, however, has resulted in debt service payments as a percentage of current receipts and GDP increasing to 17.1% and 2.9% respectively.

In the current fiscal, for the first half of the year, the trade balance and current account deficit continues to improve, as imports decline at a faster clip compared to exports. Capital flows in the current fiscal have improved with higher FDI and FII inflows. Consequent, debt-servicing burden, as a percentage of GDP is not likely to increase in the current fiscal.

The survey indicates that the outlook for the external sector continues to remain cautious, as September 11 events have increased the downside risks to global output growth. Breaking the momentum of the slowdown will depend largely on the policies adopted by developed nations to bring their economies out of the slump. India, to an extent, is immune to these sharp swings in the cycle, as the external sector contributes an estimated 10% of the GDP. Renewed growth in the domestic economy will push up imports and widen the current account deficit. Therefore, it is imperative that India adopts policies that build its non-debt creating capital flows.

Equitymaster requests your view! Post a comment on "External Sector: The gap narrows". Click here!


More Views on News

These Stocks Have Rallied Over 300% In the Last 12 Months. Is the Rally Justified? (Views On News)

Nov 12, 2021

As many as 150 stocks from the BSE 500 index deliver multibagger returns in the past one year.

Ultimate Guide to Hedging Your Portfolio (Fast Profits Daily)

Sep 21, 2021

How can you protect your portfolio in a market crash? Find out in this video.

Ride the Indian Real Estate Revival with this 'Different' Smallcap Stock (Profit Hunter)

Mar 23, 2021

Affordability in the housing segment has never been so good in last one and a half decade. Here's how you could make the most of it...

My Latest Stock Recommendation (Fast Profits Daily)

Oct 9, 2020

How I picked an exciting stock using trends from both the commodity and equity markets.

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms