Apr 7, 2012

Balance of Trade - Is it alarming?

India's merchandise trade deficit for the period Apr 2011 - Feb 2012 is around 167 Billion USD. The figure for the previous corresponding period was 115 Billion USD. So, we are looking at an annual deficit of around 180 billion USD once the March data comes in. Merchandise trade is only a part of the total Balance of Payment. Services and other invisibles have made up for the merchandise deficit for many years now. Good capital inflows have added to the reserves. So there was no reason to worry about negative balance of trade. Our Balance of Payments position has been good for many years now, despite a negative Balance of Trade. 

There is no hard and fast rule that determines what is a good trade surplus or deficit in international trade. There are indicators such as trade deficit to GDP ratios that are used as a rule of thumb, but then, they are just that. There is also a rough check where one can see if the merchandise trade deficit is adversely affecting the current account balance and if the effect is severe. I personally like this indicator when taken as a proportion of GDP. And the pictures doesn't seem very rosy this year. One can see this link (table 6.2), to have an idea of progressively deteriorating Current account deficit to GDP ratio. The CAD (current account deficit) to GDP ratio at market prices has increased from 1 % in 2006 to around 3.8% in 2012. The trade balance continued to deteriorate whereas the invisibles (including services) remained more or less constant as a proportion to GDP. So, the slippage has started. The capital accounts are still holding out the front and hence the overall BoP looks good, but then, if the current account goes the way it is going now, it won't take time before even the capital accounts fails to hold up. Particularly worrisome is the recent upswing in the way imports have grown. 

On a side note, Wikipedia maintains a ranking of countries based on current account balance. And we are in good company. Our estimated current account deficit, at around 62 billion USD, is almost the same as Brazil, Canada, UK, France, Turkey etc, all of them, without any alarm. At the same time, we also have Italy, Spain, Portugal too hovering nearby. And the biggest name, at the bottom, is the US, but then, it's a different story and hence ignored.