External sector: Waiting for recovery… - 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: Waiting for recovery…

Feb 27, 2003

India's external environment continued to show signs of sluggishness in the year FY02. The current account balance, which showed a surplus for the first time in last 24 years, is expected to continue in the current year as well if the half yearly estimates are anything to go by. However, such a surplus may not continue for long, as this continues to be on the back of stagnant exports and decline in imports (notably non-POL).

Current Account: No longer deficit
(Rs m)FY00FY01FY02
Trade Balance-17,841-14,370-12,703
Source: Economic Survey 2003

The performance of the Indian economy continues to show resilience registering healthy GDP growth rate at a time when the global markets continue to reel under recession. The aftermath of the September 11 attacks and resultant uncertainty and spending cuts in the world's largest economy, the US, continue to impact growth rate. Other major economies of the world, notably Japan and developed nations in the EU too, have witnessed lower growth rates in recent years.

Though the worst seems to be over in terms of growth in global trade volume, which is estimated to have grown by over 2% in 2002 as compared with marginal negative growth witnessed in 2001, it is still lower as compared with that witnessed in 2000 (at 12.6%). The IMF pegs the growth for the year 2003 at marginally over 6%. This points the fact that though delayed, the much-vaunted recovery, which began in early 2002 is expected to continue gradually.

India: Powering ahead...
(GDP growth)200020012002
World GDP4.7%2.2%2.8%
Source: Economic Survey 2003

The balance of payments for India reflects mixed developments. While exports remained stagnant at previous year's levels, imports declined by 2.8%, resulting in decline in merchandise trade deficit to 2.6% GDP in FY02 from 3.1% the previous year. With buoyant invisibles, the current account turned into surplus for the first time in 24 years. Stagnant exports growth in FY02 has been attributed to weak demand for products from the developed markets. On the other hand, decline in imports was mainly in the POL category (down 10%) for the year. In the current year however, based on the first half figures, the trend has reversed, as imports have marginally inched up on the back of increased POL imports (due to firm crude prices) and going by movements in the crude in the past five months it is expected that growth in POL imports is likely to be in excess of 18% for the entire FY03.

India's performance in merchandise trade has been better than most countries (incl. Asian counterparts). As a consequence of continued sluggish growth in world exports for the last couple of years, India's share in the total world exports inched to 0.7% in FY02. In the current year, the export growth has been robust at 20.4% (for the April-December period). The strength in exports comes on the back of gradual recovery in developed economies and consequent firm commodity prices. Sectors such as gems and jewelry, textiles, engineering goods and ores & mineral have performed particularly well so far. Imports growth, which was stagnant in FY02, has picked up in the current financial year on the back of firm crude. POL imports as a consequence jumped nearly 20% as compared with modest 12.6% growth in non-POL items. Though modest, growth in non-POL/non gold imports coupled with pick up in industrial production and increased non food credit points to gradual recovery.

Contribution of manufacturing sector to the overall exports took a beating in FY02 due to deceleration/decline in key export segments like textiles, steel products and engineering goods. Agri-product exports too remained subdued during the year due to decline in tobacco and cashew nuts (the major agri commodities that are exported). Petro products, however, recorded healthy growth owing to increased refining capacity. In the current year however, agri-products and manufactured products have recorded a growth of 3% and 16% respectively so far. As a result, the contribution of each of these segments (manufacturing/ Agri-products/ petro products) altered marginally in the last two years. While petro-products have constituted around 5% of the total exports (up from 3.8% in FY01), manufactured goods and agri-products have lost marginally.

Contribution of non-POL items to the overall imports increased marginally to 4.5% (up from 3.7%) in FY02 driven by increase in higher imports of food and related items. Imports for capital goods and other intermediate goods too improved taking their contribution up by 10-20 basis points to 11.4% and 30% respectively.

In the current year, the growth in POL imports (17%) propelled the growth in imports to 13% YoY for the seven month of April-October. Non-POL items, notably food and food products, intermediate products, and mineral and metals contributed to increase in imports by 6.5%.

Though there has been a gradual improvement, the global economic indicators outlook on most developed countries has been weak especially USA. This coupled with recent geopolitical tensions in the Middle East has pushed the chances of speedy recovery even further. Though surging foreign exchange reserves have provided a cushion on a capital account front, the country is still some time away from full convertibility. Going forward, the balance of payment outlook depends upon several factors most critical of which is the growth in exports. Inconsistent performance of merchandise exports in the past does not augur well for healthy balance of payments, since it exposes the economy to the risks of sharp increase in deficits in case of uncertainty such as that faced in crude prices.

Having said that, steady increase in foreign investment have strengthened the balance of payments position in the recent past and given the potential for much higher increase in FDI/FII inflows, the balance of payments position is expected to remain at comfortable levels in the foreseeable future.

Equitymaster requests your view! Post a comment on "External sector: Waiting for recovery…". Click here!


More Views on News

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?

Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

Apr 29, 2020

Ajit Dayal on how the mutual fund industry robs you of your wealth.

This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

Oct 16, 2019

If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

Gold could Hit 40,000 Sooner Than Expected (Profit Hunter)

Aug 16, 2019

Domestic gold prices are firing on both engines now. Gold prices could touch 40,000 faster than you could imagine.

3 Rebirth of India Opportunities Are Racing Ahead in These Gloomy Times... (Views On News)

Jun 28, 2019

Tanushree Banerjee shares an update on the Rebirth of India and reveals her top 3 trends...

More Views on News

Most Popular

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

I Believe These Stocks Will Deliver the Most Outsized Returns in 2021 and Beyond (Profit Hunter)

Sep 23, 2020

Rules of the racetrack can help you bag the biggest gainers of the coming decade.


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms