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Indias external sector is gaining strength

Indias external sector is gaining strength
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The outlook for the external sector is perhaps the most favorable since the 2008 global financial crisis and especially compared to 2012-13, when...

The outlook for the external sector is perhaps the most favorable since the 2008 global financial crisis and especially compared to 2012-13, when elevated oil and gold imports fuelled a surge in the current account deficit. The Global Economy is likely to gain strength if lower global crude petroleum prices drive the demand recovery process in emerging markets. After the global crisis of 2008, the global economy came under a cloud of uncertainty and prolonged weakness in euro area particularly since 2011.

  • India’s Merchandise Trade, helped improve India’s share in global exports and imports from 0.8 per cent to 1.0 per cent from 2004 to 2013.
  • Current account deficit is still an important challenge looking forward.
  • India’s trade deficit declined to US$ 135.8 billion from a high level of 190.3 billion in 2012-13.
  • Lower growth in oil imports.
  • Negative growth in gold and silver imports.
  • India’s total external debt stock at end March 2014 stood at US$ 442.3 billion (8.0 per cent) over the end-March 2013 level.

This led the IMF to revise the global growth downwards. The global economic environment appears poised for a change for the better with recent sharp fall in the international prices of crude petroleum which is expected to boost global aggregate demand.

On the Issue of India’s Merchandise Trade, over the last ten years, India’s Merchandise Trade (on custom basis) increased manifold from US$ 195.1 billion in 2004-05 to US$ 764.6 billion in 2013-14 helping in improving India’s share in global exports and imports from 0.8 per cent to 1.0 per cent respectively in 2004 to 1.7 per cent and 2.5 per cent in 2013.

  • The Economic Survey says the overall trade performance signals an opportune time for withdrawal of restrictions on gold.
  • The financial inflows in excess of the financial requirements have helped shore up foreign exchange reserves (US$ 328.7 billion at the end of January, 2015). These have helped to lessen the vulnerability concern that led to serious stress last year.
  • Reconciling the benefits of the financial inflows with their impact on exports and the current account remains an important challenge going forward.
  • In 2013-14, India’s trade deficit (on custom basis) declined to US$ 135.8 billion from a high level of 190.3 billion in 2012-13 mainly on account of a decline in the growth of imports even though growth in exports was sluggish at 4.7per cent.
  • The decline in imports owed to lower growth in oil imports (0.4 per cent) and negative growth in gold and silver imports.

Some of the Trade Policy Measures Taken by the Government as per the Economic Survey

  • To promote domestic manufacturing capabilities different schemes namely FPS, FMS, VKGUY, MLFPS, Served from India Scheme, Agriculture Infrastructure Incentive Scheme (AIIS) for import of goods can be utilized for payment of excise duty for domestic procurement. This is an important measure for import substitution and will help save foreign exchange as well as creates additional employment.
  • Similarly scrips issued under the FPS, FMS, Vishesh Krishi and Gram Udyog Yojana(VKGUY) schemes can be utilized for payment of service tax.
  • To diversify India’s export, seven new markets (Algeria, Aruba, Austria, Cambodia, Myanmar, Netherlands, Antilles and Ukraine) have been added to FMS and 7 new markets(Belize, Chile, El Salvador, Guatemala, Honduras, Morocco and Uruguay) to Special FMS, 46 items to MLFPS and 12 new markets for first time and 100 new products to FPS list.
  • Indian trade portal www.indiantradeportal.in was launched on 8th December, 2014.

Even though 2013-14 witnessed a sharp depreciation of the rupee in the initial part of the year with significant reserve drawdown, steps taken by the government and the Reserve Bank of India (RBI) resulted in a rise in the stock of foreign exchange reserves which was placed at US$ 304.2 billion at end-March 2014 as against US$292.0 billion at end-March, 2014.

In the first half of 2014-15, India’s foreign exchange reserves increased by US$ 18.1 billion on BoP basis (that is excluding valuation effect). Economic Survey says among the major economies with current account deficit, India is the second largest foreign exchange reserve holder after Brazil.

Post 1991 BoP crisis India’s prudent external debt policy and management with a focus on sustainability, solvency and liquidity have helped contain the increase in size of external debt to moderate level. India’s total external debt stock at end March 2014 stood at US$ 442.3 billion (8.0 per cent) over the end-March 2013 level.

The rise in the external debt during the period was due to long term debt particularly NRI deposits and commercial borrowings. At the end of September, 2014, a long term debt accounted for 81.1 per cent of the total external debt vis-a-vis 79.8 per cent at the end of March, 2014 and short term debt accounted for 18.9 per cent of the total external debt vis-à-vis 20.2 per cent at the end of March, 2014. The net external commercial borrowing has also increased from US$ 2.4 billion in 2013-14 to US $3.4 billion in 2014-15.

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