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>> JULY 7, 2004
External sector: And it recovers!
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The outlook for the external sector for 2002-03, as portrayed by last year's economic survey, read -'Global outlook remains uncertain, given the weak growth impulses in major advanced economies, especially in the US, and the downside risks to such recovery emanating from the volatility in international crude oil price and the continuing geopolitical tension in the Middle East.' Optimism all around!
Now read what the introduction to the external sector in this year's economic survey states - 'After a subdued performance activity for nearly three years, global economic activity is finally showing distinct signs of revival. The optimism about a buoyant economic global economy emanates largely from a turnaround in the US and the robust growth outlook for emerging Asia.'
Before going any further, 'external sector' refers to the country's performance on the foreign front (exports, imports, foreign debt and investments and exchange rate).
How did the world perform?
See, what a change a year of high growth can do to the optimism regarding the sustained recovery of the global economy! All the more, the IMF (International Monetary Fund), which marginally downgraded world growth rate in January 2003, is now expecting a sharp rebound in the calender year 2004. The IMF also expected the growth rate to be maintained in 2005. Now, while these projections in GDP and trade growth take into consideration the high crude oil prices, they are based on an improved US economic growth. One major event, as indicated in the economic survey, has been the additional stimulus to the global economy due to a recovery in Japan and developing Asia, the latter is likely to post a 7% growth in 2005 (as indicated in the table below). Both India and China are likely to be the key driving forces behind the fast growth of developing Asia.
Source: World Economic Outlook, 2003
|GDP growth (%)||2002||2002||2003||2004E||2005E|
|World Trade Volume (% growth)||0.1||3.1||4.5||6.8||6.6|
And, how did India?
Improving global economic recovery and, consequently, trade has helped India post a higher current account surplus during the period April to December 2003, very much in line with surpluses posted by other emerging nations from the Asian region. While the balance on trade (exports minus imports) continues to be negative, a growing invisible account (includes private transfers and service exports) has resulted into this current account surplus for the Indian economy. However, the survey states that when calculated, as a proportion to GDP, India's current account surplus at 0.5% is still much lower than others like Malaysia (11.1%), Indonesia (3.9%) and China (2.1%).
** Data for 2003-04 pertains to the April-December period
Another surplus, on the capital account, has been mainly a result of increased NRI deposits and FII inflows. As a matter of fact, FII inflows into India, which were at a low of US$ 0.3 bn during 2002-03, reached a high of US$ 10 bn during 2003-04. While low interest rates in the US markets acted as a push factor for these high level of FII inflows, the relative attractiveness of the Indian economy acted as the pull factor. However, despite this optimism with regards to FII inflows, inflows on the FDI front continue to remain appalling. As a matter of fact, India received a mere US$ 2.5 bn during the period April-December 2003, a decline of 9% over the same period in 2002.
A strong balance of payments position in recent years has then led to a strong and steady rise in the level of foreign exchange inflows into the country, one of the major reasons for the continued appreciation of the Indian rupee. As a matter of fact, vis-à-vis the US dollar, the Indian rupee has appreciated by more than 5% in the last year. Being the sixth-largest reserve holder in the world, India' forex reserves currently stand at over US$ 119 bn. A major reason for the build-up of these high forex reserves has been strong capital inflows (especially FII inflows) into the Indian markets. Apart from appreciation in the value of the rupee, these inflows have resulted into increased money supply in the Indian economy, which despite the Central government's high borrowings, has led to interest rates remaining low.
However, while low domestic interest rates have aided the increase in government's internal debt, the economic survey has stated that a prudent external debt management policy pursued over the last decade has improved the country's external debt position to a comfortable level. India's external debt stock, which was US$ 84 bn during 1990-01, stood at US$ 112 bn at the end of December 2003. As a matter of fact, after remaining in the top fifteen debtor countries in the world in the last decade, India improved its position from being third after Brazil and Mexico in 1991 to eighth in 2002. All the more important, India's short-term debt to total external debt ratio in 2003, at 4.4%, is much lower than that for China (28.5%) and Thailand (20.1%).
As stated at the beginning of this write-up, improved performance of the global economy during the year gone by has raised the prospects for this growth to continue in 2004 and 2005 as well. However, the survey states that there are several downside risks to this buoyant growth expectation, the more important of which are - hardening of the global crude oil prices, volatility among major currencies and rising interest rates in the developed economies. However, there is another major factor that, we believe, is likely to have a major effect on the global economy - the China slowdown.
Now, as far as the Indian economy is concerned, this improvement in global economic (and trade) performance is likely to benefit the Indian economy in a major way, however, not without the abovementioned risks. In India's case, the risk of rising interest rates in the developed world (read, the US) hold prominence. This is because a sharp rise in the US interest rates might lead to the outflow of Foreign Institutional Investors (FIIs) money that will then be parked in the relatively safer US treasury bills and bonds.
While a further opening of the global economy is likely to benefit India in terms of the country having a wider market access, it will also bring with it many challenges. It remains to be seen how we safeguard against such global events in the future.
Read our Budget Glossary for definitions of key terms.
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