Trade deficit data portrays mixed picture (Apr-Oct '99) - Views on News from Equitymaster

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  • Dec 2, 1999 - Trade deficit data portrays mixed picture (Apr-Oct '99)

Trade deficit data portrays mixed picture (Apr-Oct '99)

Dec 2, 1999

According to the trade data released by the commerce ministry, there has been a marginal decrease (US$ 30 m) in the trade deficit during the seven months ended 31st October 1999. While exports surged 10% during this period, import growth has lagged at 7.5%.

(US$ bn)Oct-99 YoY change Apr - Oct 99 YoY change
Exports 3.2 22.0% 20.8 10.0%
Imports 3.9 15.4% 26.6 7.5%
Trade Deficit 0.7 -5.1% 5.8 -0.5%

Although the picture may not look all that rosy, trade figures for the month of October do bring some cheer. During this month, export growth surged 22% while imports, too, grew by a stealthy 15%. The decline in the trade deficit was sharper for the month at 5%.

The significance of a decline in the trade deficit emanates from the fact that there has actually been a sharp rise in the price of crude oil, a major component of Indian imports. Infact, oil imports have grown by over 52% during the seven-month period to US$ 5.2 bn. The oil import bill for the entire year has been estimated at US$ 9 bn.

The export sector seems to be gaining momentum even as imports log in lower rates of growth. Although this is beneficial for the trade deficit, it may not be so for the economy. This is because to pursue economic development and build competitive advantage India needs to modernise its plants, improve infrastructure and step up industrial capacity to cater to domestic and international needs. Achievement of these goals requires the presence of a large and vibrant capital goods industry that is both price and technologically competitive. Needless to say, a majority of Indian companies lack on both counts. Therefore the need to import capital goods, to pursue development in the domestic economy.

The newspaper reports are silent on the issue of imports of capital goods. Some economists have stated that the slower growth of imports during the period under consideration is due to a decline in the import of capital goods. It has also been pointed out that there exists an output gap (excess capacity) in the Indian economy and therefore this need not be a cause of immediate concern. However, as building up capacity is a time-consuming process, economic growth in the future may be constrained if the economy sustains the present momentum and investment activity continues to lag. (Note that the figures pertain to the trade deficit. They exclude import and export of invisibles including software).

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