A Picture Of External Health

India recorded a current-account surplus for the third year running in the fiscal year ending March 31 2003. BMI View: Despite a fast-rising import bill, exports of software services will keep the current account in the black for another year. Software services are now India's most valuable service-sector export.

India's external accounts remain a picture of health. In the fiscal year ending March 31 2003, India recorded a balance-of-payments surplus worth US$16,980mn. The surplus on the current account widened to widened to US$3,708mn or 0.7% of nominal GDP, compared with a revised surplus of US$782mn or 0.2% a year earlier. The deficit on the merchandise trade account was little changed at US$12,474mn, but the invisibles' surplus widened due to fast-rising earnings from software services and private transfers. The invisibles' surplus increased by US$2,296mn to US$16,182mn. India's foreign-exchange reserves have soared to all-time highs of more than US$80bn — sufficient to cover more than eight months' worth of imports of goods and services. Its stock of reserves is now the sixth largest in the world. Meanwhile, the rupee has strengthened rapidly against a weak US dollar. By August 15, it had appreciated 3.6% against the greenback since the beginning of the fiscal year, to trade at INR45.82/US$.

During the first three months of 2003/04, merchandise exports rose by 11.1% year-on-year (y-o-y) to US$13,147mn, and merchandise imports by 27.1% to US$17,328mn. Non-oil imports were worth US$12,510mn between April and June — a rise of 30.0%. Import growth will continue to outstrip that of exports this year, BMI believes. Demand for foreign-made goods will strengthen as the economy gathers pace, while falling import tariffs make those goods more affordable.

Finance Minister Jaswant Singh cut the peak rate of customs duty by five percentage points to 25% in the late February budget and announced a reduction in rates of excise duty. An appreciating rupee will also make foreign goods cheaper. On a balance-of-payments basis, we expect India's merchandise trade deficit to widen to US$15.935mn in 2003/04.

Services Lend Support — India's current account will nonetheless remain in the black for at least another year. Services exports are booming. Last year, exports of software services rose 27.1% to US$9,600mn. They are now India's most valuable services export, worth nearly 40% of total receipts. Service-sector exporters will benefit from a series of tax concessions this year under revisions to the export-import (EXIM) strategy announced by Commerce Minister Arun Jaitley in late March. Exporters earning more than INR 1 mn in foreign exchange yearly are entitled to import a raft of goods free of duty. The EXIM strategy is aimed at lifting India's share of world trade to 1.00% by 2007/08 from the present 0.67%. Private transfers or remittances from Indian contract workers abroad will also support the current account in 2003/04. They rose 21.5% last year to US$14,815mn.

With foreign reserves at all-time highs, India is now moving ahead with its decade-old policy of capital-account liberalisation. The rupee is fully convertible on the current account, but only partially convertible on the capital account. A series of exchange controls have been eased or removed outright in a bid to encourage overseas investment — a far more efficient use of resources than simply accumulating ever-greater reserves.

In January, Finance Minister Singh doubled the ceiling on Indian mutual funds' investment in overseas stocks to US$1 bn, and allowed Indian companies and individuals to invest in foreign-listed firms holding a stake of at least 10% in an Indian company. He also scrapped the US$20,000 limit on remittances via employee stock options. Earlier, the Reserve Bank of India (RBI) had doubled the amount of foreign exchange Indian residents could take on visits abroad to US$10,000. It also permitted them to deposit foreign currency obtained abroad in domestic current accounts. Further liberalisation measures are likely this year. Full capital-account convertibility, however, remains some way off.