That's critical if exports are to pick up
Thanks to the continuing slowdown of imports—non-oil, non-gold imports fell 12.7% in February—the current account deficit looks all set to beat all expectations. From $88.2 billion in FY13, most scoffed at the finance minister when he targeted a $70 billion number for FY14—we could end up with a number just slightly over half that, more so since the model code of conduct means the government cannot lower gold import curbs, something UPA Chairperson Sonia Gandhi was keen on. The flip side of this is that slowing imports are a sign that the economy continues to look for a bottom. Project good imports, for instance, are down 31% in April-January FY14 over a year ago; coal imports are down 7%, a sign of the continuing low electricity demand in the economy.
More worrying is the continued slowing in exports growth. After a remarkably poor performance in the year’s beginning when exports were contracting—1.1% in May 2013 and 4.6% in June—growth averaged 12% between July and October. Since then, however, growth has been slowing, to 5.9% in November and 3.8% in January 2014 and in February, exports contracted 3.7%. Some part is understandable—petroleum exports contracted 10.4% in February, probably the result of global oil prices falling, and in any case, this would be matched by a fall in oil imports. More worrying is the 2.8% fall in engineering exports and the 4.2% fall in gems and jewellery exports—engineering exports rose 10.4% in the April-January period.
One of the reasons cited for the February contraction is the withdrawal of the Generalized System of Preferences for Indian exports by the European Union; the finance ministry denies it has withheld duty drawbacks of R10,000 crore, one of the reasons cited by exporters. The more likely cause would be the sharp appreciation of the rupee—from 56.5 to the dollar in the end of May, it depreciated to 66.6 in end-August, but then started appreciating again to 61.2 on Wednesday thanks to the sharp increase in dollar inflows. Apart from the $34 billion of FCNR deposits that came in during the December quarter, around $5.8 billion has come in the debt markets since the beginning of the year. If RBI is not already doing it, it needs to start buying dollars in the market, to both keep the rupee weak as well as to increase its foreign exchange reserves—according to the latest data, in January, RBI sold $1.9 billion after 3 straight months of buying dollars. That has to change.