ECONOMY

M Lakshmiram
TRENDS IN INDIA'S B O P
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Not very
products further support the rising
demand. Also autos / CV sales are
strong. Such a situation keeps us very
vulnerable to rising global oil prices.
May be the Godavari Basin gas

comfortable
discovery will mitigate these adverse
trends; but it is to be proved.
Fortunately, the 10 per cent trade
deficit is reduced considerably by the
invisibles - mainly software services
Until few years ago, our trade deficit used to be equal and remittances. Here again, the
disturbing trend is the slowing growth
to our oil imports; this is no longer true. Trade rate in software services - in FY2010,
deficit is reduced considerably by the invisibles – software exports grew hardly by 10
per cent compared to the historical 20
mainly software services and remittances. FDI & FII per cent plus growth rate. Whether
remittances can remain robust in
flows fund our current account deficit. coming years with fewer Indian
L AST MONTH RBI released India's equal. Thus the trade deficit was students going abroad needs to be seen.
Balance of Payments Data for FY 2010. essentially caused by our oil imports. Needless to emphasise, any slow-down
An analysis of its major components in This is no longer true. In the last few in software exports and remittances
the last five years is presented in Table years, even without taking into will worsen our current account
1. account oil imports, we have been deficit dramatically as it has happened
One notices trade deficit stabilizing running a trade deficit. This will only in FY2009 and FY2010.
at a high 9 per cent to 10 per cent of worsen further as our GDP growth
GDP; it has doubled in the last four rates climb higher in coming years. Huge rise in FDI and FII flows...
years; export growth slowing down- Our Capital account flows - mainly loans,
actually it was negative last year; Uncontrolled rise in oil imports FDI & FII flows - comfortably fund our
imports growing at a rate higher than Oil imports are rising without control. current account deficit. As long as India
exports and on a larger base. They are a function of demand for remains a favourite destination for global
Until few years ago, our trade petro-products - petrol, kerosene, investors, we should not face serious
deficit used to be equal to our oil diesel, LPG, etc. With per capita problems in funding our current account
imports - that is our exports and non- incomes rising, demand for all these deficit. However, this should not deter the
oil imports used to be more or less products are rising. Subsidies on these policymakers from addressing the
worsening flow of trends in rising trade
U.S. Dollars Billion FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 deficit and slowing invisibles.
Current account Against such a macro backdrop, the
rupee exchange rate is determined
a) Trade Account essentially by capital account flows - if
Exports 105.2 128.9 166.2 189.0 182.2 they are excessive as in 2007-08, rupee
Imports 157.1 190.7 257.6 307.7 299.5 will rise sharply and if they are
Trade balance -51.9 -61.8 -91.4 -118.7 -117.3 inadequate as in 2008-09, rupee will
Trade Balance as % of GDP -6.2% -6.5% -7.4% -9.8% -8.9% depreciate. There are no strong trade
Oil Imports - Customs 43.8 56.9 79.6 93.7 85.5 account and current account
Non-Oil Imports - Customs 105.2 128.8 171.8 210.0 193.2 fundamentals which can sustain a rising
rupee. At best what we can hope for is a
b) Invisibles 42.0 52.2 75.7 89.9 78.9 range bound rupee (say Rs. 40 - Rs. 50 to
of which: the U.S. dollar).
Software Services 22.7 29.0 36.9 43.5 48.2 The major advantage China has over
Remittances 24.5 29.8 41.7 44.6 52.1 India is her strong trade and current
Current Account Balance -9.9 -9.6 -15.7 -28.8 -38.4 account surpluses year after year. That's
Cur. a/c Balance as % of GDP -1.2% -1.0% -1.3% -2.4% -2.9% how China has accumulated vast forex
reserves over years which gave her the
Capital account 25.5 45.2 106.6 7.2 53.6 financial strength to undertake mega
of which: infrastructure investments year after
Loans 7.9 24.5 40.7 8.7 12.2 year while our trade and current
FDI 3.0 7.7 15.9 17.5 19.9 account deficits restrict us from
confidently planning and implementing
FII 12.5 7.1 27.4 -14.0 32.4
such mega infrastructure investments.
Forex reserves 145.1 191.9 299.1 241.6 252.8
The author is a financial analyst.

40 INDUSTRIAL ECONOMIST AUGUST 2010