The economic environment of India's External Sector has continued to experience growth in output and trade during 2005-06 and 2006-07 despite global macroeconomic imbalances, prolonged Doha negotiations, volatile international crude oil prices, and inflation. This has been suggestive of the dawn of a new phase in Indian Economic History.
In this new phase, China and India together have accounted for nearly 40 % of global growth measured in purchasing power parity terms. Consequently, India is being recognized as an important market economy in the global economic scenario.
The booming phase in External Sector brought about by global output expansion can be characterized by stable growth in world trade volume, reasonable stability in world trade prices, and supportive growth in capital flows (net) to emerging market economies and developing countries.
Let us now study the individual entities of India's External Sector
Balance of Payments (BoP)
India, as an economy, has grown from strength to strength in BoP following the Economic Reforms of 1991. Growth was uninterrupted despite a widening of the Current Account Deficit from 2.5 billion USD in 2004-05 to 9.2 billion USD in the following year which was equivalent to 1.1% of GDP. India's Balance of Payments situation for the period 2004-05 can be summarized as follows:
- Exports - 85.2 billion USD
- Imports - 118.9 billion USD
Current Account The following trends were noticed in India's current account on the basis of BoP as a proportion of GDP:
- Exports had grown from 5.8 % in 1990-91 to 13.1% in 2005-06.
- Imports rose from 8.8 % during the same period.
- Trade Deficit as a proportion of GDP, which had actually declined from 3.0% in 1990-91 to 2.1% in 2002-03, widened to 6.4% in 2005-06 owing to higher outgo on import of Petroleum, Oil and Lubricants (POL) with large increases in international POL prices.
Capital Account
So far, capital flows into India remained strong on an overall basis with Capital Account Surplus rising simultaneously with Current Account Deficit. Debt creating flows, particularly external assistance and External Commercial Borrowing (ECB), which had turned into net outflows in 2002-03 and 2003-04, became positive inflows in 2005-06. Non Resident Deposits (net) rebounded after an outflow of about 1 billion USD in 2004-05 to an inflow of 2.8 billion USD in 2005-06.
External Trade
India's total external trade, including goods and services, grew by 31.2 % to 361 billion USD in 2005-06.
Merchandise Trade
India's merchandise exports (in US dollar terms and on customs basis), which have been growing continuously at a high pace of more than 20 % since 2002-03, continued its momentum and grew by 23.4 % to cross the 100 billion USD mark in 2005-06.
Composition of Merchandise Trade
- Major drivers of export growth during 2005-06 were petroleum products, engineering goods, and chemicals.
Direction of Trade
- The share of 11 major trading partners of India, accounting for nearly a half of India's trade, has not changed much since 2000-01. US continues to be the single largest trading partner of India, though with a declining trend.
Services Trade
- India has been recording high growth in the export of services during the last few years. Such exports have increased threefold during the last three years; in 2005-06, with a growth of 42.0 % , it reached 61.4 billion USD.
Exchange Rate Developments
- With a flexible exchange rate regime and interventions limited to maintaining orderly market conditions, the Average Annual Exchange Rate of the 'Rupee' has appreciated steadily from INR 48.40 per USD in 2002-03 to reach Rs.44.27 per USD.
Foreign Exchange (FOREX) Reserves
- The continuous inflow of capital has resulted in further accretion to foreign exchange reserves. During 2005-06, Forex Reserves rose sharply from 141.5 billion USD in March, 2005 to 151.6 billion USD in March, 2006.
External Debt
- India's External Debt Stock stood at US$126.4 billion in March 2006, reflecting an annual increase of 3.2 billion USD owing to a rise in ECB, NRI deposits, and Short-Term Debt.
In coming years, India's External Sector is likely further its growth momentum. Global Output Growth in 2007 has been projected at 4.9 %. With the current upsurge in investment, exports are expected to continue rising, hence resulting in higher imports.