In April-July 2003, however, with export growth at just below 10 per cent in dollar terms (and less than 5 per cent in rupee terms), the merchandise trade deficit has grown by as much as 120 per cent an increase of $2.7 billion. This development is likely to convert the current account balance in the April-June quarter from the surplus of $655 million in 2002-03, to a deficit of about $1.4 billion this year. If the trend continues, it could wipe out the large ($1.8 billion) current account surplus in the July-September quarter of 2002-03. Which would, of course, ease the upward pressure on the rupee with all the concomitant consequences for capital flows, credit demand and (some) interest rates, asset prices and export competitiveness.
Reappearance of current account deficits will warm the hearts of many, whose vision of the economy is in terms of irreducible letters I, S and C denoting investment, savings and consumption respectively. Current account deficits mean the existence of an excess of domestic demand requiring to be financed by the inflow of foreign savings equal to the current account deficit. Voila, the abomination of the consistent current account surpluses of the last one-and-a-half years is finally past.
Which is not entirely untrue. Current account surpluses do signify an excess of savings (over domestic investment demand), another outcome of the same process, which has weakened the demand for credit, that for manufactures (and hence of output growth) and kept inflation subdued. As was pointed out by the Commerce Ministry when releasing the latest trade data, the bulk of the increase in imports this year has come from non-oil imports (29 per cent increase in dollar terms), the higher level of imports surely reflective of a surge in domestic demand. Perhaps, even the lower level of exports could (at least for some commodities) be ascribed to improved conditions of demand in the more profitable home market.
But as is so often the case, matters are not as straightforward. We are the champion buyers of that one thing whose lustre never fades gold. In each of the past four years, we have imported between Rs 18,000 and 20,000 crore of gold. But month-to-month there is often considerable variation, undoubtedly a consequence of the progress of seasons and the price of the yellow metal.
In 2002-03, the rupee value of gold imports, with respect to the previous year, fell in the first quarter and remained flat in the second. It experienced modest growth in the third, but shot up in the fourth quarter, more specifically in the month of March 2003, when it increased by a whopping 151 per cent. The recovering appetite for gold has continued into this fiscal. In April 2003, the rupee value of gold imports rose by 157 per cent and in May, by 137 per cent. The dollar value increases were of course even larger.
Hence, for the period April-May 2003, while the rupee value of all merchandise imports rose by 18 per cent, that of non-oil imports rose by 22 per cent. But non-oil, non-bullion imports increased by a more modest 15 per cent, which in dollar terms is close to 20 per cent. There is every reason to think that the same was true for June and July. Which is all indeed pretty good. Strong goods demand signifying an uptick in the pace of economic activity, and strong gold demand perhaps signifies the confidence to put away larger disposable incomes into long-term assets.
The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)