Trading Deficts

The trade deficit for India has expanded to just a shade short of $10 billion in just one month of fiscal 2008-09. That is a fairly somber note to open the year. If the trend persists, India could end this year with a trade deficit of over $100 billion, netting out a couple of months of plus and minus. In absolute terms that means blocking up a third of the total foreign exchange reserves for meeting this deficit. For comparison, fiscal 2007-08 ended with a merchandise deficit of $80 billion.

What does this do to the level of current account deficit? Would it therefore touch something like 3.5% of the GDP? Fiscal 2007-08 had ended with the deficit on a far happier note at close to 1%. The trinity that now scares analysts is the combination of a high deficit propelled by fuel imports, way above the $77 billion recorded last year as prices climb up, the expanding trade gap despite a fall in rupee and a shrinking capital flow from abroad. In that combination, the foreign exchange reserves would be thin platform to weigh on.

But this is not necessarily correct. Indeed, this is going to be a year of turbulent financial markets across the world. That would mean the options of financing the deficit are going to be clipped. But so far, there is little evidence of any trend that global finance is swishing out of emerging markets, fearing a collapse. Sure, year to date the foreign institutional investors have withdrawn net $5 billion from the Indian stock markets, compared with the accretion of $19.5 billion in 2007. The key factor is that this reversal has nothing much to do with the weakness of the Indian stock markets.

Till June 17, 2008, as per Sebi data, the FIIs have made a gross investment of $9.9 billion (year to date). In the same period last year that investment was far less at $6.8 billion. This basically means there is no lack of interest among overseas entities to bet on India. There is reason for that. Going by the lowest estimate, the one put out by the Global Development Finance report of the World Bank, the Indian GDP growth is expected to be 7%, one of the two best growth rates in the world. In fact, that is the key theme of the current turmoil in the financial markets. The emerging...