Having said this, there are interesting points made in the strategy paper about the numbers. For instance, projecting on basis of trends between 2002-03 and 2009-10, export/GDP ratio in 2013-14 is projected at 17.5%, extrapolating on the basis of IMFs GDP forecasts. Similarly, import/GDP ratio in 2013-14 is projected at 30.3%, thus leading to an alarming balance of trade deficit of 12.8% of GDP in 2013-14. The strategy paper then asks legitimate questions about the financing of this trade deficit. In 2009-10, the trade deficit was 7.6% of GDP. While the question is legitimate, the numbers should be treated with some scepticism. First, both export and import numbers were distorted from 2008-09. Consequently, should trends have been based on 2002-03 to 2009-10 However, this is partly a pedantic point, since both imports and exports dipped from 2008-09 and the matching point remains. Second, and more importantly, something is clearly wrong with the commerce ministrys GDP numbers. They involve nominal GDP growth rates of between 10% and 11%. IMFs World Economic Outlook, on which GDP numbers are purportedly based, provides projections of real GDP growth and these have historically tended to be a shade lower than the actual.
The commerce ministrys paper doesnt explain how real GDP growth has been converted into nominal GDP growth. Clearly, some GDP deflator has been used. Whatever is the GDP deflator, nominal GDP growth has generally been around 14%, not between 10% and 11%. Correcting for this anomaly reduces trade deficit in 2013-14 to a slightly more respectable 11.5%. To complicate matters, these numbers are not just about merchandise trade, but also about merchandise trade that goes through customs and DGCI&S. Not every transaction goes through this process; defence imports being a case in point. In passing, Indias trade now is no longer what it used to be in the 1970s and 1980s, since India also exports refined petroleum products. Thus, an increase in crude oil prices no longer impacts balance of trade the way it did then. But to return to the point, is there enough cushion in the invisibles account to cushion trade deficits that are 11.5%, if not 13% of GDP So far, remittances havent suffered that much, even after the global financial crisis. Question-marks are more about net invisibles through services. In net terms, service exports have been sluggish, both because inflows have been adversely affected by the global financial crisis and because outflows have increased. Thus, for specific quarters, though never for a full year, current account deficit/GDP ratio has crossed 4%.
There can be no unanimity about tenable levels of current account deficits, since that is a function of the nature of capital inflows. Assuming a figure of 3.5% and balance of trade deficit of 11.5% in 2013-14, net invisible inflows will have to increase to 8% of GDP. If one projects on current trends, that is unlikely. But they did amount to 7.4% in 2008-09 and, had pre-financial crisis trends continued, 8% is not impossible. In addition, one needs to focus on the nature of capital flows. While differences between portfolio capital and FDI can be blurred, there is concern that inbound FDI has declined in 2009-10 compared to 2008-09 and the earlier trend of continuous increase has been reversed. Simultaneously, outward FDI shows no sharp signs of reversal. Paraphrased, there are concerns about business climate in India and outward FDI can be a manifestation of this. Therefore, while the commerce ministrys projections are unduly alarming, managing BoP over the next three years will be a matter of some concern, particularly if oil prices continue to escalate. There is a cushion, but there are pins in it.
The author is a noted economist