For 1H 2005-06, India recorded a current account deficit of US$12.96bn.

With the booming economy, India’s foreign trade also flourished in recent years. Both exports and imports recorded sharp growth during the past three years, reflecting the onset of international competitiveness of the manufacturing sector. The other factors which helped to boost the trade are trade integration with the global economy, a supportive domestic policy framework, sustained recovery in global demand and an increase in international commodity prices. During the past decade (1995-96 to 2004-05) India reported an average export growth rate of 12.1% while import reported an average growth rate of 147% during the same period. India continued its growth momentum in 2004-05 as well. Exports at Rs.3,560.7bn during 2004-05 registered a growth of 21.4%, the highest recorded in the last three decades.

Export growth was led by most of the product categories. Due to the expansion in domestic refining capacity and higher international prices of refined products exports of petroleum products surged by 86.1% to Rs.305.2bn. With the rise in refining capacity India emerged as one of the top five petroleum refining countries in the world. Exports of ores and minerals, textiles, manufactured goods, engineering goods, gems and jewellery continued to record a substantial jump. On the other hand, exports of agricultural and allied products remained subdued, reflecting domestic supply conditions. During the first half of the current fiscal also exports continued to be robust.

Table 1: India's Foreign Trade

Source: RBI Annual Report 2004-05, DGCI & S

Economic buoyancy led to surge in import

The buoyant economy also caused imports to grow by 34% to Rs.4,810.6bn in 2004-05. This was the highest growth recorded since 1980-81 on top of 27.3% in 2003-04. The spike in imports in 2004-05 was mainly led by demand for oil necessary to sustain the economic resurgence. Oil imports at Rs1,340.9bn shot up by 41.9% in 2004-05, mainly on account of the higher international crude oil prices. In line with the pick-up in domestic manufacturing activity, non-oil import increased by 31.1% during 2004-05. Imports of mainly industrial inputs, capital goods, gold and silver remained robust. Imports grew by 33% in 1H 2005-06 as compared to 37.4% during the same period previous fiscal.

Trade deficit

India has always been a trade deficit country primarily due to heavy dependence on oil imports. The trade deficit at Rs1,250bn during 2004-05 touched a historic peak with the 41.9% increase in oil imports. During the first half of the current fiscal, India reported trade deficit, which increased from US$11.9bn during Apr-Sep 2004 to US$20.3bn in Apr-Sep 2005.

Since 2001-02, India recorded current account surplus, however, this trend was wrecked in 2004-05 when India reported a current account deficit of Rs295bn or 0.9% of GDP. For 1H 2005-06, India recorded a current account deficit of US$12.96bn. The current account deficit in 2004-05 was driven mainly by the higher trade deficit which reached 5.5% of GDP. As the engine of Indian economy is running on all cylinders, it needs raw materials and other inputs to sustain its growth momentum. Net invisible receipts rose by 18.7%, supported by buoyant services exports and sustained remittances from Indians working overseas. The importance of invisibles can be gauged from the fact that despite huge trade deficit to the extent of Rs.1,711.2bn, the current account deficit was just Rs.295bn. Thus, invisibles were responsible for a lesser current account deficit despite huge trade deficit. During 2004-05, the net invisible surplus at 4.6% of GDP was able to finance around 83% of the trade deficit.

The surge in remittances, particularly since the information technology revolution in the 1990s, has placed India as the highest remittance receiving country in the world. In the capital account, the surge in imports was mainly due to overseas borrowings by Indian banks, trade credits and external commercial borrowings. Foreign Direct Investments (FDI) also picked up strongly during the year. The country has emerged stronger on the global investment radar in 2005, overtaking the United States for the first time to become the second most attractive FDI destination in the world, according to the latest FDI Confidence Index, by A T Kearney.

External Debt and Foreign Exchange Reserves

India's total external debt as of end-September 2005 stood at US$124.3bn. Both long-term and short-term debts contributed almost equal amount to the increase in external debt. Commercial borrowings increased sharply during the year as access of the corporates to international capital markets improved during the year. India’s foreign exchange reserves stood at US$141.5bn as on March 31, 2005. At end-March 2005, India held the fourth largest stock of international reserve assets among emerging markets. India’s foreign exchange reserves at 14.3 months of imports are higher than other emerging markets in Asia.

Overall, India is expected to record robust growth in exports as well as in imports. The buoyancy in economy will ensure that trade deficit to widen further while India is likely to report current account deficit going forward.