Falling rupee not a trade gap solution

Last Updated: Sat, May 05, 2012 05:46 hrs

The falling rupee's impact on India's widening trade deficit is unlikely to be in a single direction. Nor is the overall effect clear at the moment.

The trade deficit, the excess of merchandise imports over merchandise exports, rose to $184 billion in 2011-12, around a tenth of GDP, higher than in the global financial crisis period of 2008-09. Though the rupee fell against the dollar for most of the year, exports faced slackening demand in Europe and America; while imports of oil and gold saw a spurt.

The current account deficit (CAD) -the trade deficit along with the balance on services trade, remittances and some investment income-jumped to four per cent of GDP in the first nine months of 2011-12 against 3.3 per cent in the corresponding months of 2010-11.

A depreciating rupee will encourage exports and discourage imports of non-essential commodities, economists said. However, certain imports like crude oil are crucial and may not respond much to prices, they added.

"The depreciating rupee should help curb the trade deficit. Considering other things to be at current levels, this will lead to a gain in exports. Also, the costlier imports will result in import of only necessary articles," said CARE Ratings' chief economist, Madan Sabnavis.

The country will certainly gain in exports, said Anis Chakravarty, economist at Deloitte, Touche Tohmatsu. "Our major concern is oil imports and corrective measures are expected on oil prices domestically," he added.

As for the CAD, Sabnavis said,"It should improve marginally because of the falling rupee."

However, Chakravarty sounded a word of caution-services exporters have to look for new markets for expansion of businesses. Economists add that if oil prices go much higher, such as beyond $140 a barrel, both the trade deficit and CAD would be casualties even if the rupee kept falling. The country meets 80 per cent of its crude oil demand from imports. High crude oil prices coupled with a 12.3 per cent depreciation in the rupee pushed up the oil import bill by 41 per cent to $141 billion in 2011-12.

Worse, the government's subsidy burden on this count would surge even more, as it has failed to allow oil marketing companies an increase in retail prices. Every Re 1 increase in payment due to a weakening rupee leads to under-recovery for Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum by around Rs 9,000 crore.

The government had provided for only Rs 23,640 crore towards oil subsidy for 2011-12, but it had to be increased to Rs 68,481 crore in the revised estimates. For this financial year, it has provided for Rs 43,580 crore, which many critics have called a clear under-provision.

Chakravarty said immediate corrective measures in oil prices are needed to improve the situation. In fact, the finance minister is slated to meet opposition parties and state chief ministers to evolve a consensus on oil reforms after the budget session of Parliament concludes later this month.

Similarly, the fertiliser subsidy is pegged at Rs 60,974 crore for this financial year, lower than the Rs 67,198 crore in the revised estimates for 2011-12. India imports all its requirements for potash and a substantial amount of phosphate and urea.

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