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Worries Over Growth Prospects After Trade Deficit Widens
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India's trade deficit in March was the highest in four months, at $11.79 billion, as exports continued to fall, underscoring risks for growth prospects in Asia's third largest economy.
A plunge in global prices of crude oil, by nearly half since last June, has slashed India's import bill, making for a less worrisome trade deficit, despite a drop in exports in recent months.
That could be about to change, with policymakers and businesses fretting that weak foreign demand could torpedo Prime Minister Narendra Modi's globe-trotting 'Make in India' campaign to boost export-oriented investment.
Since winning power last May, Modi has visited major economies, including the United States, Japan, France, Germany and Canada, and set a goal of doubling exports to $900 billion over the next four years.
Annual figures published on Friday for the full fiscal year that ended in March showed merchandise exports declined 1.2 per cent to $310.5 billion, while imports were down 0.6 per cent, at $447.6 billion.
That widened the annual trade deficit for Asia's third-largest economy to $137 billion in the 2014/15 fiscal year from $135.8 billion in the preceding year, with the fall in net exports likely to hurt gross domestic product.
A closer look at the monthly figures shows a sharp slide in both imports and exports since September, however. Economists worry exports could remain sluggish if demand in major markets such as Europe and the US slumps further and the rupee appreciates.
"Reforms that would significantly boost export prospects, such as loosening labour laws and easing land acquisition, have not been forthcoming. Unless this changes, exports look set to remain a weak spot," said Shilan Shah, India economist at Capital Economics in London.
"Growth in exports is very important for India to meet its ambition of growing at double digits, but very little could be done in the short-term to push exports," he said.
The Reserve Bank of India has cut interest rates twice this year, and is intervening in forex markets from time to time to curb the rupee - a relief for exporters hit by the euro's decline of a fifth against the Indian currency over the past year.
Europe's share in India's merchandise exports fell more than 2 percentage points to 18.1 percent in the 11 months to February, to stand at $51.6 billion, while other regions showed growth in sales, Commerce Ministry data showed.
"Our worry is that volatility in the currency markets could hurt exporters, but the RBI is addressing that through market interventions," one senior finance ministry official told Reuters.
Non-oil imports could pick up this year, due to recovery in the manufacturing sector, added the official, who declined to be identified as he is not authorised to speak on policy issues.
But the trade deficit in financial year 2015/16 could still fall to $90 billion to $100 billion, on lower oil prices.
Short-term trade dynamics are weak, however, amid a dearth of global demand. Goods exports fell in March for the fourth month running, to $24 billion, a drop of more than 17 per cent from last September's peak. Imports slid over the same period to $35.7 billion.
"Most of our factories are working for eight hours against 24 hours earlier as orders from Europe have dried up," said S.C. Ralhan, chairman, Federation of Indian Export Organisations (FIEO).
Exports have been on downward spiral since December last year. The previous biggest decline in export was in July 2009, when exports dipped by 28.4 per cent.
Falling exports and an increase in gold imports have widened the trade deficit to four-month high of $11.79 billion in March.
Gold imports in March almost doubled to $4.98 billion.
Falling exports of petroleum products (59.5 per cent), gems and jewellery (8.36 per cent), chemicals (5.36 per cent) and engineering goods (2.5 per cent) have led to the sharp contraction in March. These sectors contribute about 70 per cent to the country's total exports.
"We have to move at higher end of the value chain. The figures are not good. We are still exporting lower-end products," FIEO Director General Ajay Sahai said.