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Trade Deficit Revised Up As Exports Falter

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Indian imports continued to outpace exports in February as demand remained weak in major exports markets like the United States and Europe, nudging the government to revise up the full-year trade deficit projections on Friday.

A widening trade deficit will likely worsen India's current account deficit and further weaken the rupee.

Merchandise exports grew an annual 4.3 per cent to $24.6 billion in February, while imports grew 20.6 percent to $39.8 billion, Trade Secretary Rahul Khullar said on Friday, citing provisional trade data.

The trade deficit widened to $15.2 billion during the month, from $14.8 billion in January.

With exports struggling to maintain the growth rate seen between April and September, Khullar revised up trade deficit projection for the fiscal year ending on March 31 to $175 to $180 billion from an earlier estimate of $160 billion.

"Over the last five months...there has been a very large ballooning of the balance of trade deficit," he said.

The trade deficit was $104 billion in the last fiscal year.

Meanwhile a  Reuters poll showed that India's industrial output probably edged higher in January but remained subdued as an increase in production of consumer goods was offset by declines in the capital goods and mining sectors, a Reuters poll showed.

A survey of 25 economists this week showed they expected Indian industrial production (IIP) to have grown by a median 2.1 per cent in January from a year earlier, compared with 1.8 per cent in the previous month.

Forecasts in the poll ranged from a decline of 1.2 per cent to an increase of 4.6 per cent, with only one contributor expecting a contraction.

Exports Short Of Target
Exports reached $267.4 billion between April and February -- bolstered by demand for engineering goods, petroleum products and pharmaceuticals -- compared with the full-year target of $300 billion.

As demand in major export markets remain weak, the full-year figure is expected to be little short of the target.

"You are within striking distance of $300 billion, but you might not actually make it," Khullar said, estimating the total merchandise exports for 2011-12 to be in the range of $292-$298 billion.

Last month Khullar had projected the current account deficit to reach 3.5 per cent of GDP this fiscal year, its worst in at least eight years, as the full-year trade shortfall was seen at $160 billion.

With the government revising up the shortfall figure, the current account deficit is also likely to widen further.

The deterioration in the current account deficit could pile pressure on the rupee, which fell nearly 16 per cent against the US dollar in 2011 before recovering this year, making it more reliant on volatile capital inflows to fund the gap.

Slowing IIP
Industrial production growth has been slowing for two years on a sequential basis, the 3-month moving average of the data has shown. That momentum is now at its slowest since mid-2009.

"The fifth consecutive decline in the mining sector and the fourth consecutive decline in the capital goods sector is a cause of concern and calls for some concrete measures by the government to improve the investment activity in the economy," said Arun Singh, senior economist at Dun & Bradstreet.

Worryingly, the production of capital goods, an indicator of investment in the economy, shrank for the fourth straight month in December, contracting 16.5 per cent from a year earlier while mining fell 3.7 per cent in the same period.

Consumer goods output, on the other hand, grew by a solid 10 per cent but infrastructure sector output, which accounts for almost 40 per cent of industrial production, grew a meagre 0.5 per cent in January.

However, the expected weakness in the reading would seem to contradict findings in the manufacturing Purchasing Managers' Index (PMI), which jumped to an 8-month high of 57.5 in January.

The February PMI survey showed continued healthy expansion. Though the headline pace slowed slightly to 56.6, new orders touched a 10-month high.

"The infrastructure number has been low and the PMI has been high so we are getting confusing signals as far as these two things are concerned," said Madan Sabnavis, chief economist at CARE Ratings.

"I don't think there is too much buoyancy expected in this quarter for industries. Overall, conditions in the industry are going to be fairly depressed for the entire year."

Factory output in Asia's third-largest economy accounts for roughly 15 per cent of GDP and averaged just 1 percent growth in the final three months of 2011.

India's economy grew 6.1 per cent in the quarter to December, its weakest annual pace in almost three years, as rampant inflation and tight monetary policy by the Reserve Bank of India hampered growth.

Government estimates show GDP will average 6.9 percent growth this fiscal year. That is a far cry from the heady 9.5 per cent growth India averaged in the three fiscal years between 2005-2008.

The RBI ended its 20-month interest rate tightening cycle in October last year and has asked the government to cut its fiscal deficit to help rein in inflation as it prepares to ease monetary policy. It cut the reserve requirement for banks in Janaury.

Finance Minister Pranab Mukherjee will present the annual budget on March 16 and is expected to address the worsening deficit from slowing economic growth and the rising subsidies for fuel and food.

To rein in the fiscal deficit, he may raise taxes on a number of manufactured items as well as consider increasing factory gate duty on many items, a government adviser said last week.

Sabnavis said there could be a 2 percent increase in excise as an additional revenue earning measure but that everything depended on higher growth taking place.


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