India’s balance of payments scenario at the end of the third quarter reveals an extraordinary resilience in the external sector, despite increasing global uncertainties and a soaring trade deficit. Surprisingly, the numbers show that an appreciating rupee has had a stronger impact on services than on merchandise trade. While the 24.6% growth of merchandise trade in the April-December period of 2007-08 was marginally higher than in the corresponding period of the previous year, service sector exports decelerated by nearly a third to 17.1%, which is far below their trend rate. Thankfully, the overall export shortfall was more or less neutralised by a 42.5% increase in remittances. All in all, the current account deficit rose only 14.5% in dollar terms and held almost stable in rupee terms. Exchange rate trends also seem to have boosted capital inflows, especially in the second and third quarters, with net inflows going up to $81.9 billion in the April-December period, far overshooting the $30.1 billion in the corresponding period of the previous year. While the bulk of this was in the form of foreign investment, which more than doubled, external commercial borrowings also increased three-fourths during the period. Surging capital inflows stuffed India?s foreign exchange vaults with an additional $67.2 billion in the first nine months of the year. On the capital account, outward FDI by Indian firms seems to have stabilised in the $10-billion region.
For all that, there is some reason for caution. The slowdown in service sector exports, with growth rates decelerating in three of the six major segments, needs to be watched. Software exports have slipped in the April-December 2007 period, even though they were going smoothly upwards in the same period the previous year. The other services affected include transport (mainly aviation and shipping), where growth has decelerated by more than half, and business services, where earnings actually declined during the period. In contrast, the other three service export segments, namely, tourism, financial services and communications, have registered buoyancy with growth rates more than doubling. The external sector is on an even keel, and India has considerable cause for continued comfort. This, however, should not result in complacency, given worldwide trends.