India’s Trade Deficit Grows Worse

Here is a Beijing Time report from last May about India's Widening Trade Deficit:

(emphasis mine)

India's Trade Deficit Widening
2008-05-16 From:

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.

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!

Here is a December Reuters reports about India's swelling current account deficit:

India's current account deficit swelled to a record $12.54 billion in the September quarter and analysts warned on Wednesday it could balloon further as the world economy slows, putting pressure on the rupee.

The government's fiscal deficit also widened in the first eight months of the 2008/09 fiscal year, and analysts said it was on course to overshoot its target due to extra spending and a slowdown in revenue collections from sagging domestic growth.

The rupee has lost 19 percent against the dollar this year, its worst performance since a balance of payments crisis in the early 1990s, due to a rising oil import bill and foreign fund outflows from the share market amid the global financial crisis.

'The third quarter numbers are going to be much worse as, though there will be lower merchandise and current account deficits due to falling global commodity prices, we may see a capital account shortfall,' said Sujan Hajra, economist at Anand Rathi Securities in Mumbai.

The overall balance of payments fell into deficit for the first time in three years. The BOP deficit in the July-September quarter stood at a quarterly record of $4.73 billion, compared with a revised surplus of $29.24 billion in the year-ago quarter.

The current account deficit stood at $4.3 billion in same period a year earlier and $9.79 billion in the prior three months of 2008/09, according to central bank data.

Finally, Bloomberg reports about India's economic troubles:

Dec. 31 (Bloomberg) -- India's rupee completed its biggest annual drop since 1991 as a global financial crisis prompted overseas funds to favor safer bets than emerging-market assets. Stocks dropped by a record this year.

Offloading Equities

Overseas investors bought a record $17.2 billion of Indian shares in 2007, helping the rupee rally 12.3 percent, the biggest annual gain since at least 1974. It touched 39.185 a dollar on Nov. 7, 2007, the highest in almost a decade. Funds have since offloaded a record $13.4 billion in 2008, according to Securities and Exchange Board of India's data.

The Sensex had its biggest annual drop since at least 1980, when data on the gauge is available.

For the year, Hindustan Unilever Ltd., the nation's biggest maker of household products, was the only stock on the Sensex to rise, gaining 17 percent. Jaiprakash Associates Ltd., India's biggest builder of dams, fell the most on the measure, with an 81 percent slump.

India's exports dropped in October for the first time since 2001 and industrial production posted its first decline in 15 years, official figures show. The $1.2 trillion economy may expand as little as 7 percent in the year through March, the slowest pace since 2003, the finance ministry said in its mid- year review on Dec. 23.

Dollar Sales

The central bank's dollar sales in October exceeded purchases by a record $18.7 billion to curb the decline in the local currency. It sold a net $5.25 billion this year through October.

"It is only the central bank that can make a significant change to the rupee's trend," said Paresh Nayar, chief of currency and fixed-income trading at Development Credit Bank Ltd. in Mumbai. "In 2009, I think the capital flows on their own won't impact the exchange rate beyond a point."

India's foreign-exchange reserves have declined by $62.2 billion from an all-time high of $316.2 billion reached in May, indicating it sold dollars.

Central banks intervene in currency markets to influence exchange rates by arranging sales or purchases of dollars. The Reserve Bank of India has sold dollars for two straight months.

My reaction: Unlike other Asian countries such as China, India has run a current account deficit during the last few years. Until recently, this wasn't a problem as strong capital flows from tourism, software services, and remittances not only financed this deficit, but also allowed India to increase its foreign reserves to an all-time high of 316.2 billion in May of 2008.

With global slowdown and selloff of emerging markets, those capital flows have now reversed. India's central bank has been forced to selloff its US holdings to curb its currency's decline, and its total reserves have decreased by $62.2 billion. The central bank's dollar sales in October alone exceeded purchases by a record $18.7 billion.

India now has $254 billion foreign reserves left, the majority of which will be sold next year to protect its currency. Like oil producers, India has made the switch to from a buyer of dollars to a seller of dollars. As for oil producers, the question remains: who is going to buy all these dollar assets up for sale next year?

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0 Responses to India’s Trade Deficit Grows Worse

  1. Yohay says:

    Together with other countries current accounts, Indian money will also pressure the dollar down.

  2. Anonymous says:

    Can someone please explain why aren't seeing hyperinflation yet? The FED is electronically releasing trillions of extra dollars on the market yet everything is deflating. Could it be that there won't be inflation? That the government will simply order the banks in closed door sessions (who are holding on to all the brand new dollars) NOT to lend them out? This would make the dollar scarcer and give us the deflation much like what happened during the Great Depression. As banks are basically nationalized at this point why couldn't this happen?

  3. "Can someone please explain why aren't seeing hyperinflation yet?"

    That is easy. Because of hedge fund redemptions, there was a huge one time inflow of money into the dollar from emerging markets. That is ending now, and the dollar's fall will pick up steam in comming weeks.

  4. برامج says:

    i also say that India in the last 5 year has jumping a pig steps to be one of the biggest economy country on the world الفيسبوك

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