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Trade balance: Getting a grip

Dec 1, 2000

The news on the domestic front may not be all that encouraging. Indeed, growth in industrial production slumped from a high of 11.8% in February to 4.8% in August 2000. The trade balance on the other hand dipped to US$ 300 m in September as compared to US$ 1.1 bn in April. One of the primary reasons for the improvement in the external accounts is the high growth recorded by exports over the last few months. Growth in imports on the other hand has slowed down considerably. This is largely due to the waning of the year on year impact of high crude prices and the decline in imports of capital goods. Consequently, in the month of September, there was a year on year decline in trade deficit.

(USD bn) Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00
Exports 3.4 3.5 3.3 3.6 3.6 3.9
(YoY change) 30.3 30.5 27.8 16.6 17.7 25.0
Imports 4.5 4.5 4.1 4.3 4.1 4.2
  43.9 31.7 13.5 20.2 7.1 5.0
Trade Balance (1.1) (1.0) (0.8) (0.7) (0.5) (0.3)
  112.2 36.0 (22.6) 41.6 (33.6) (66.2)

The growth in exports will bring much-needed succor to the domestic industry, which has been reeling under the pressure of cheap imports and slackening demand in domestic markets. The decline in the trade deficit, meanwhile, will bring solace to the forex markets, which have witnessed high volatility in recent months.

The current account balance, which includes the trade balance and the imports and exports of services, too, will show an improvement. This is so because the export revenues from India's highflying software sector (estimated to be in range of US$ 6 bn for the current year) are categorized as services.

However, concerns arise when one considers the capital account. FII inflows have been erratic in recent months. Indeed in October there was a net outflow of Rs 2.7 bn. FDI, on the other hand, continues to grow, but at a rate much slower than what was targeted.

India surely seems to have got a grip over the trade deficit. However, with the equally important capital account showing erratic trends, there is no place for complacency.

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