India’s foreign exchange reserves continue to be comfortable

CAD remains within manageable levels

External indebtedness on a declining path

The Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman tabled the Economic Survey 2018-19 in Parliament today.

On India’s External Sector, the Economic Survey states that it continues to be stable. Although the Current Account Deficit (CAD) increased to 2.1 per cent of GDP in 2018-19, up from 1.8 per cent in 2017-18, it is within manageable levels. The widening of the CAD has been driven by a deterioration in the trade deficit from 6.0 per cent of GDP in 2017-18 to 6.7 per cent in     2018-19. Rise in crude oil prices in 2018-19 led to the deterioration of trade deficit. Acceleration in the growth of remittances has, however, prevented a larger deterioration of CAD. In funding the CAD, the total liabilities-to-GDP ratio, inclusive of both debt and non-debt components, has declined from 43 per cent in 2015 to about 38 per cent at end of 2018. Further the share of foreign direct investment has risen and that of net portfolio investment fallen in total liabilities, thereby reflecting a transition to more stable sources of funding CAD. In sum, although CAD to GDP ratio has increased in 2018-19, the external indebtedness continues to be on a declining path.

The Survey notes that India’s foreign exchange reserves continue to be comfortably placed in excess of USD 400 billion. The Rupee traded in the range of 65-68 per USD in 2017-18 but depreciated to 70-74 in 2018-19. The exchange rate in 2018-19 has been more volatile than in the previous year, mainly due to volatility in crude prices, but not much due to net portfolio flows. The Real Effective Exchange Rate also depreciated in 2018-19, making India’s exports potentially more competitive. The income terms of trade, a metric that measures the purchasing power to import, has been on a rising trend, possibly because the growth of crude prices has still not exceeded the growth of India’s export prices.

India’s External Debt was USD 521.1 billion at end-December 2018, 1.6 per cent billion lower than its level at end-March 2018.  The long-term debt declined by 2.4 per cent to USD 417.3 billion at end-December 2018 over end-March 2018, though its share was mostly same at 80.1 per cent of total external debt compared to 80.7 per cent during the same period.

The composition of India’s exports and import basket has by and large remained unchanged in 2018-19 over 2017-18. India’s merchandise exports stood at USD 330.07 billion in the year 2018-19.  Petroleum products, precious stones, drug formulations, gold and other precious metals continue to be top export items. India’s import was USD 514.03 billion during the year 2018-19 and crude petroleum, pearl, precious, semi-precious stones and gold remained as top import items. The trade deficit was USD183.96 billion during the period.  India’s main trading partners continue to be the US, China, Hong Kong, the UAE and Saudi Arabia.

Trade Facilitation

India ratified the WTO Agreement on Trade Facilitation (TFA) in April 2016 and subsequently constituted a National Committee on Trade Facilitation (NCTF) which has played an important role in reducing the high cost of imports and exports so as to integrate our cross-border trade with the global value chain.  These efforts have resulted in substantive improvement of India’s performance in ‘Trading Across Borders’ indicator as well as in ‘Ease of Doing Business’ ranking. The logistics industry of India has also seen significant development which has led to a jump in India’s global ranking in the World Bank's 2016 Logistics Performance Index.

Trade related logistics:

A draft National Logistics policy has been announced by Government of India, for which a national logistics action plan is being developed.  The key objective is to drive economic growth and trade competitiveness of the country through a truly integrated, seamless, efficient, reliable and cost effective network through various logistics schemes.

OUTLOOK

 The World Economic Outlook (WEO), April 2019 has forecast acceleration of world output in second half of 2019.  The key assumptions in this regard are continued accommodative monetary policy stance in advanced countries and fiscal stimulus in China and de-escalation of trade tensions between the US and China.  There could be pressure on crude oil prices to increase as world output grows yet that may not impact India since growth in world output will also favourably impact India’s exports.  Government policies are expected to further lift restrictions on FDI inflows, which will continue to increase the stability of sources funding the current account deficit.  From a macro-economic perspective the deterioration of CAD may be contained if consumption slows down in the economy while increase in investment and exports become the new drivers of the Indian economy

Foreign exchange reserves remain comfortable, supporting external stability despite a wider current account deficit driven by trade deterioration. The Economic Survey states that foreign exchange reserves remain comfortable and support external stability despite a widened current account deficit driven by a deteriorated trade balance from higher crude prices. Financing of the deficit has shifted toward more stable sources-an increased share of foreign direct investment and a lower share of net portfolio investment-while total liabilities to GDP have declined. External debt levels fell modestly with long term debt predominant. Trade facilitation measures and a draft National Logistics Policy aim to reduce trade costs and boost export competitiveness.