Cautiously optimistic

India’s external sector which, like the rest of the economy, has been passing through a bad patch, has recently found some reasons to cheer. The Commerce Ministry’s trade data for September, released on Wednesday, showed the merchandise trade deficit narrowing down to a 30-month low of $6.76 billion from $17.5 billion a year earlier and $10.9 billion in August. Exports grew in double digits for the third month in succession. Indian goods and commodities are finding growing acceptance in global markets. The sharp depreciation of the rupee has boosted the export competitiveness of a range of products, including engineering goods, textiles and leather. A revival in demand in Europe and the U.S. — traditionally India’s most important export destinations — has certainly helped. The country’s imports, on the other hand, fell by more than 18 per cent on a year-on-year basis, to a 30-month low of $34.43 billion. Imports were lower thanks to fiscal and administrative measures to check the inflow of gold. Demand for oil has been lower and the government has been taking steps to curb non-essential imports. The lower trade deficit figures, if sustained, will naturally have major implications for the macro economy. This is possibly the best economic news in recent months and comes at a time when multilateral agencies such as the IMF and leading brokerages have significantly lowered India’s growth forecasts for the current year.

Whether the momentum on the trade front will continue and revive economic growth remains to be seen. The improved trade figures, however, do help in alleviating a key macroeconomic concern — getting a handle on the current account deficit. A recent RBI report on the country’s balance of payments during the first quarter of this year (April-June 2013-14) pegged the CAD at $21.8 billion (or 4.9 per cent) but expected it to fall from the second quarter onwards on the back of sharply declining gold imports and improved exports in select categories. With such expectations materialising, many analysts expect the CAD to be contained within the official target of $70 billion during this year. The worst might be over for the country’s balance of payments but it is necessary to look beyond the CAD and take a holistic view of the external sector. India’s external debt profile is skewed towards short-term debt. At repayment time there will be enormous stress. Second, the current account will remain under pressure because of high coal imports and negligible iron ore exports. These are structural issues which cannot be remedied easily.