The latest BoP estimates brought out by the RBI for the current fiscal?s first half signals a sudden slowdown in service sector exports. Given the resilience demonstrated by this sector in the past, this is a rude jolt. Capital inflows, which more than doubled to $93.7 billion in the second quarter of the year, have been exerting upward pressure on the rupee?s exchange rate all through the past year or so. Now, the debilitating effect of the strong currency has reached the showpiece of India?s export story. Merchandise trade, which saw the most bellyaching, has emerged largely unscathed. Growth in merchandise exports has maintained a stable 20% odd clip in each of the first two quarters of the year, almost the same level as in 2006-07. But service sector exports, which account for a third of India?s total, have seen their growth declining sharply from 32% in 2006-07 to 12.2% in the first quarter of 2007-08 and further to 5.2% in the second quarter. Low single digits speak of a rout more than resilience.
The slowdown is especially worrisome as important segments that account for the bulk of the sector?s exports, like software services (41%), business services (25%) and transportation (11%), have taken a severe hit. Software service exports, which grew by around one-third to $31.3 billion last year, slowed down to around 20% in the first quarter and then to 10.6% in the second quarter. This puts a big question mark on the sustainability of India?s software success under a new macroeconomic environment that might feature a relentlessly rising rupee. Business services, which saw exports double to $19.2 billion last year, have fared poorly too, with the segment?s value of exports having fallen sharply in the first two quarters. What does all this imply for India?s BoP situation? The already yawning trade deficit widened by close to a third to $42 billion over the fiscal?s first half. With the slowdown in service exports, one would have expected the current account deficit (which includes invisibles) to have widened too. Yet, surprise, surprise, it remains stable at about $10 billion, almost the same level as in 2006-07?s first half. How come? Thank a spurt in remittances from non-resident Indians. This figure grew by almost 50% to $19 billion over that period. Clearly, having diversified dollar sources has its advantages.
