Thursday, February 24, 2011

India's ballooning trade deficit unsustainable - govt

(Reuters, Feb 23, 2011) - The Indian government raised "serious concern" on Wednesday about a trade deficit that could more than double to $278.5 billion in three years and may cause an unsustainable current account deficit.

The trade deficit of Asia's third-largest economy could widen to 12.8 percent of gross domestic product (GDP) by 2014 from 7.2 percent in this fiscal year on current trends, leading to a higher reliance on foreign capital inflows to plug the current account gap, a trade ministry document showed.

Trade officials floated a series of possible measures in a strategy paper to bolster exports and slash import growth in key sectors such farm products and coal, which they said would keep the trade deficit at a manageable level.

"The projected BoT (balance of trade) deficit on the merchandise account of 13 percent is clearly cause for serious concern because it can lead to an unsustainable CAD (current account deficit)," the document published on Wednesday said.

India is on track to exceed a 15 percent export growth target in the financial year ending this March.

While IT and service exports have played a huge role in India's economic boom, merchandise exports have lagged behind the potential of the world's second-fastest growing major economy, which is seen returning to a pre-crisis growth rate of 9 percent soon.

India aims to double its merchandise exports within three years to match its growing economic heft and lift its exports to an annual total of $450 billion by 2013-14.

"Services earnings will most certainly grow over the next few years. However, it is unlikely that even their growth can sustain a ballooning of the BoT deficit to the size of 13 percent of GDP," the document said.

"A large widening of the trade deficit can potentially result in payments difficulties."

TARGETING EXPORT GROWTH

Trade minister Anand Sharma floated a series of possible measures on Wednesday to accelerate the growth of Indian exports, from moving car manufacturing up the value chain to a PR campaign to promote the quality of Indian products abroad.

A document published by his ministry also suggested a list of longer term measures to tame India's import growth, from reforms to boost farm productivity to increasing domestic coal supplies.

The paper was short on specifics but was intended to spark discussion on how to improve India's trade balance.

"One of the major reasons for us to take this initiative and put it in place on an urgent basis is because of the widening balance of trade," Anand Sharma told reporters.

"With the initiatives that we have proposed in the strategy paper, we hope to close the gap and make this balance, or the gap, in trade to below 10 percent or very close to 9 percent of the GDP which ... is perhaps achievable and also manageable."

While talks for a global commerce deal drag on, India has pushed a series of trade and investment deals with the likes of Japan, Malaysia and the European Union.

India could also benefit from the flipside of high import growth in the coming years to make its domestic industry more competitive, said N.R. Bhanumurthy, an economist at National Institute of Public Finance and Policy, a think-tank.

"High imports would improve productivity in the economy and exports also, ultimately narrowing down the trade deficit in the medium term," he said. "I do not see much problem on the trade deficit front."