A slew of numbers released
recently point to rather peculiar and contrary trends in India’s
balance of payments. Exports have revived but the trade and current
account deficits widen, pointing to an excess of foreign exchange
expenditure relative to earnings. While the widening current account
deficit points to a weakening balance of payments position, foreign
exchange reserves are at record levels. The foreign exchange reserve
increase is funded largely by capital flows, consisting of a very large
share of investments in the debt market. Such large capital inflows are
strengthening the rupee and undermining export competitiveness, which
can worsen the current account position and create a vicious circle.
Yet, since the increase in external debt is treated as “portfolio
investment”, the similarities of the current situation to that before
the debt-driven balance of payments crisis of 1991 are being ignored.
And for those who want to talk up the balance of payments, there is no
shortage of comforting evidence.
The most encouraging trend
relates to the rate of growth of dollar value of exports calculated
relative to the corresponding month of the previous year. That figure
has been consistently positive over the 12 months ending August 2017,
which is a major improvement when compared with the evidence that
exports were declining for 18 months in a row till May 2016. So, there
is cause for celebration.
But a close look at the numbers reveals
that there is also much cause for concern. India’s trade deficit is
widening significantly. As compared with a deficit of $23.8 billion
during April-June 2016, the deficit has risen to $41.2 billion during
April-June 2017 or by 73 per cent over a year. This even though over
these three-month periods exports rose from $66.6 billion in 2016 to
$73.7 billion in 2017. The trade deficit has widened not because exports
are doing badly but because of a steep increase in the import bill from
$90.5 billion during April-June 2016 to $114.9 billion during the
corresponding period of the current year.
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