It shall be fair to say that present economic atmosphere is not very optimistic. What makes me conclude this ? The absolute decline in the position of both exports and imports (“Balance of Trade – BoT”) suggests so. And so to an extension does the Current Account Balance (CAB) position and Balance of Payment (BoP) situation.
Though the Modi Government seems to be trying to develop a healthy environment for the Indian industry to grow, the lack of policy measures (to name a pending few –GST and clarifications on other tax matters, power sector and land reforms and simplified corporate laws) are hurting the investor sentiment. The bull rally of the capital markets has come to a standstill and weak global economics (fears of US interest rate hike, falling commodities, and slowdown in China) is further aggravating the situation.
Significance of CAB –
One of the major parameters to judge a country’s fiscal health is to take stock of its exports and imports. The excess of the former results in a Current Account Surplus (CAS) and that of latter leads to a Current Account Deficit (CAD).
CAB becomes important because it helps gauge the demand for domestic goods abroad versus the consumption of imported ones. It also says about the ability of local manufactures to compete globally. Moreover, a CAS represents a strengthening domestic market moving towards self sufficiency. It allows the RBI to buy precious foreign exchange (primarily represented by dollar) and hold a nice buffer, which helps to keep the Rupee stable vis-a-vis the dollar. As India’s substantial energy needs are met through imported crude oil, stability of Rupee is essential to keep inflation in check. The rise in price of one essential commodity (like oil) can shake the costs of all others to move up.
Let’s look at one simple diagram explaining why crude oil holds an important position for India ?
(The diagram has been borrowed from one of the earlier posts, because it clearly summarises the impact.)
A simple virtuous cycle starting by a decline in Price of
Crude Oil resulting in boosting Growth
Now, that you have a fair idea about CAD let’s go through certain charts showing how India currently stands –
Chart 1Fall in Exports –
India’s exports have shrunk heavily since January, 2015, falling more than 10% continuously in the last 9 months. The comparison is to their corresponding levels in 2014. One of the reasons of weak exports is the fall in crude oil price. India has tremendous refining capacities – RIL and Essar Oil are few of the private players indulged in the business of importing, refining, and export more than $60 Bn (or more than Rs 3 Lac crores) worth of refined petroleum products, i.e. 20% of India’s exports in 2014-15. With Crude oil falling more than 50% in last one year, we can factor an understandable 10% decline, but still the dependency on crude is over stretched in all respects.
Chart 2 Fall in Crude as percentage of Exports –
It shows the composition of crude has stayed upbeat at around 20% of total exports in the last 2 years, but it has seen a sharp decline entering FY 2015. The fall is on account of Benchmark Brent Crude declining from $110 a barrel to $40 before covering to hover at $50 now.
Chart 3 & 4 Crude Products still form a Large Part –
All said, Petroleum products still dominate India’s exports with $11 Bn worth of crude oil products exported last quarter. Though it is less than the levels seen 4 years back at $20 Bn. Pearls and other precious stones take the second spot at $7.5 Bn in Q1’15, while pharmaceuticals have come up as a dark horse making to the podium at third with $4.3 Bn.
Chart 5 Movement of CAD –
Lower CAD in the last two years continues to be the silver lining. Stabling itself between 0-2% of the GDP, it has given the Government the necessary breathing space to focus of other measures besides worrying about the foreign exchange in their treasury.
Chart 6 Movement of FDIs and FIIs –
With PM pushing forth Make In India and Digital India campaigns, the efforts seems to be bear fruit as reflected by constant and upward inching FDIs.
Capital markets however, spooked by US Fed rate hike, below par Q1 financial results, and untimely tax demands has seem huge withdrawals by foreign participants as can be seen through the blue line in Chart 6.
Chart 7 Strong Gold Imports
One surprise movement is the buoyed demand for Gold by Indians despite controls. Indians import almost 1000 tons (10,00,000 kgs – this is aggregate from both official and illegal sources) of yellow metal every year. Importing it costs almost $40 Bn (roughly Rs 2.6 lac crores i.e. almost 2% of GDP)
Chart 8 Other Export Items, Dwindling
This chart normalises the exports excluding from the basket exports of crude products and precious metals. It takes to account core export items. Just as in chart 1, chart 8 shows a fall in exports of core products in the last 9 months. This helps to conclude that it is not only the “Fall in price of Crude oil” (Chart 2) that has impacted “Total Exports” (Chart 1), but also there has been a significant decline in exports of other commodities.
India can only fly if it has strong landing gears. And they come by strengthening domestic production capacity and ability to churn top quality products. Innovation and improved technology alone can help us become self sufficient and switch sides from bring “a net debtor” to a “net creditor” to the world. I also acknowledge it’s easier said than done – but what other choice do we have ?
Chart Credits- Business Standard