India needs $800 mn per trading day to fund trade deficit!

India’s trade deficit (the gap between exports and imports) for April was the lowest in a year at $13.4 billion, according to Commerce Secretary Rahul Khullar. Exports grew by 3.2 percent to $24.5 billion in April, while imports rose 3.8 percent $37.9 billion.

Does this herald the start of better times ahead? Not necessarily.

[caption id=“attachment_306091” align=“alignleft” width=“380” caption=“Reuters”]  [/caption]

In absolute terms, India has already racked up a staggering $185 billion trade deficit for the financial year ending March 2012. That’s equivalent to nearly 10 percent of India’s GDP. Imports of oil and petroleum products ($150 billion) and gold and silver (about $60 billion) accounted for more than 40 percent of total imports.

In theory, trade deficits in goods can be compensated for by trade surpluses in services. But as a Business Line report notes, “despite services accounting for 60 per cent of India’s GDP and much hype about India’s IT exports, the share of services in India’s total exports of goods and services is not more than one-third.”

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

A shortfall in overall external trade earnings can be compensated by capital inflows (net of foreign exchange remittances, payments and cash transfers).Unfortunately, those are also not particularly robust at the moment. Given the country’s low growth prospects, the lack of economic reforms, the government’s high fiscal deficit, regulatory uncertainty and a bunch of controversial tax proposals, foreign investors are getting fed up of India.

The cut in India’s sovereign rating outlook to negative from stable by ratings agency Standard and Poor’s also is also likely to diminish overseas appetite for Indian investments.

Is there any hope for exports to pick up substantially? Not really. A _Wall Street Journal_report says that Khullar himself admits that India will be lucky to achieve even 10-15 percent growth in exports in the current financial year given the troubled prospects of the US and Europe’s economies. In the past financial year, exports rose 21 percent.

An Enam report points out that in terms of sheer magnitude, India’s trade deficit is one of the highest in the world. “India now requires about $800 million per trading day to fund its burgeoning trade deficit as against just under $50 million a decade earlier,” it said.

Given the grim prospects of exports picking up, if foreign flows choke up, it’s inevitable the rupee will come under extreme pressure.In the end, there is only so much the Reserve Bank of India can do to prop up the currency.

As Business Line notes: “It is time Indian policymakers and businesses made concerted and coordinated attempts to tackle India’s trade imbalances before we are faced with a serious BOP (balance of payments) crisis, like the one in 1990-91.”

Amen to that.