|
|
India's Trade
Deficit Widening Anybody Listening?
by Vipin Agnihotri
Blame it to the
ever-rising oil prices and significant increase in non-oil imports, merchandise
trade deficit is widening with every passing day. And if trend continue, without
capital inflows being directed to build productive capacities, India is on the
verge of facing the next Asian financial crisis.
Foreign Institutional
investors (FIIs) is fast emerging as the main drivers of the Indian capital
market because of strong fundamentals of the Indian economy and a high
expectation on returns. With Sensex climbing up the ladder since April 2003,
setting milestones after milestones, there seems to be no stopping them either.
According to the
latest trade statistics released by the Directorate-General of Commercial
Intelligence and Statistics relating to the first five months of this financial
year (April-August), the deficit in India's merchandise trade stood at $17,431.2
million as compared with $9,728.5 million during the corresponding period of the
previous year. If this 80 per cent increase in the deficit persists over the
rest of the year, the trend could take India's trade deficit to close to $50
billion over the financial year 2005-06.
Indian markets got the first taste of globalization and liberalization, through
Mr. P Chidambaram, Mr. Yashwant Sinha, Mr. Jaswant Singh and Mr. Chidambaram who
is back in North Block - have rightly chosen not to peg either economic policy
or performance to the rise or fall of the Sensex.
India is poised to become one of the hottest contenders among emerging markets.
The Indian capital market posted a return of 27.8 percent (BSE) in 2004-05 while
in the earlier fiscal this figure stood at 40.1 percent. Since the beginning of
this financial year, the index has shown a growth of about 30 percent.
Coming back to merchandise trade deficit, it could be argued that such an
increase was bound to happen because of the sharp increase in the international
prices of oil that has increase India's oil import bill tremendously. A brief
look at the data of the first five months of this financial year clearly shows
that oil imports rose in value by close to 37 per cent from $12,002 million to
$16,428 million. What’s more, over the same period non-oil imports also rose by
a similar 37 per cent from $26,803 million to $37,763 million.
The situation looks more dim when you take into consideration the fact that
there is a creditable 23 per cent increase in the dollar value of India's
exports during April-August, yet trade deficit has widened.
According to experts, even if the increase in the oil import bill can be termed
as ‘temporary’ because oil prices must moderate or as a matter of fact can even
fall, but it cannot be said about the non-oil import bill.
If Securities and Exchange Board of India (SEBI) are to be believed, FIIs poured
Rs 3,000 crore less into the markets last fiscal as compared to Rs 44,000 crore
in 2003-04, they remained by far the main drivers of the capital market. As
compared to this, the net investment from mutual funds in the equity market was
Rs 448 crores in 2004-05.
Riding on the back of huge liquidity, the Sensex has posted a rally of almost
5,000 points since April 2003. Indeed, the day the Sensex breached the 8,500
mark, market capitalization was pegged at a massive Rs 22,84,860.34 crore.
Other BSE and NSE indices have been following suit. This is quite unlike the
past rallies of 1992 and 2001, with the sentiment running across the board.
Based on its soaring volumes, the NSE outranked the BSE to be placed a global
third. The turnover at NSE during 2004-05 was Rs 11,40,071 crore. That figure
for the BSE stood at Rs 5,18,717 crore.
The million-dollar question is whether the stock market boom will continue in
the future? Some say the market has the potential to reach the 16,000 mark or
more. Mumbai-based Rakesh Jhunjhunwala, India's richest retail investor, has
already voiced the opinion that the market will scale the 20,000 peak in the
next five years whereas others has predicted that the Sensex could cross 16,000
in the current fiscal, riding on the back of robust economic conditions.
Though all this seems rosy. But what about trade deficit which is widening very
quickly. This situation was there even during the previous two financial years
but because of significant inflows of foreign exchange on account of remittances
and exports of software and IT-enabled services, it was manageable.
According to the Reserve Bank of India, private transfers brought in a net
amount of $20.5 billion in 2004-05 and software services exports contributed
another $16.6 billion. This net inflow went a long way towards financing India's
foreign exchange requirement in that year on account of the merchandise trade
deficit .As a result, the deficit on the current account of the balance of
payments was relatively small. Since India has also been a net recipient of
substantial capital inflows on account of debt and foreign direct and portfolio
investment, this led to a huge accumulation of foreign exchange reserves that
implied a comfortable balance of payments situation.
But India’s relatively strong current account position is weakening rapidly. Net
remittances, which rose from $16.4 billion in 2002-03 to $22.6 billion in
2003-04, were down to $20.5 billion in 2004-05. While net revenues from software
services continue to increase, from $8.9 billion in 2002-03 to $11.8 billion in
2003-04 and $16.6 billion in 2004-05, the current account deficit can be
expected to widen.
Though Foreign Institutional Investors (FII) investments drive the current stock
market boom and create the euphoria that explains the lack of concern about
potential external vulnerability to the extent that foreign debt and direct
investment inflows are indeed creating new capacities, they are not generating
export revenues to finance the rising non-oil and oil import bill. But anybody
listening!
December 4, 2005
Top
The Week of December 4, 2005
India
and the New World Order by Rajinder Puri
India's Democracy Validated by Bihar State
Electoral Verdict by Dr. Subhash Kapila
The Quest for an Indian Paradigm of Management
by Pradip Bhattacharya
The Wheel of Law: India’s Secularism
in Comparative Constitutional
Context A Book Review by Aruni Mukherjee
Home of the Brave? by John Steinsvold
India's Trade Deficit Widening: Anybody
Listening by Vipin Agnihotri
Vastu and Pregnancy by
Niranjan Babu Bangalore
How Birth Order affects Children's Behavior &
Personality by Michael Grose
This "Didi" Talks
Sex by Ranjita Biswas
God's Sorry, He has made a few
mistakes.... by Michael Levy
In the Dock by NS Murty
Candid Camera on Violence by V. Radhika
Pounding the Polluters by Stephanie Hiller
Sikhs on the Silver Screen by Naunidhi Kaur
Human Trafficking: The Tragic Social Evil by
Rajesh Ramasubramanian
Progression or Regression? by G. Swaminathan
Do Hindus Believe in More Gods than One? by
Dr. R.K. Lahiri
|
|
