The current account deficit stood at $12 billion (5.0% of GDP) in 9MFY18; up by 51 percent year-on-year. On quarterly basis, Jan-Mar was marginally better than the previous quarter as the deficit is down by 6 percent to $4.1 billion. Is it due to currency depreciation of 5 percent in Dec? The impact of second round of devaluation in March is yet to translate into numbers.
Exports are slowly picking up and that is not purely based on currency adjustment. The number is up by 12 percent to $18.3 billion in Jul-Mar. The sense of urgency on external imbalances in the form of cash subsidy disbursement, taxation reimbursement and gas to industry has started translating into numbers.
Exports are also sweetened by sugar exports at subsidized rates. In September, PM right after assuming post allowed 0.5 million tons of sugar exports by giving subsidy. Later the export subsidy was extended to 2 million tons. The sugar exports stood $445 million in Jul-Mar (roughly 850K tons) versus $64 million in the same period last year. The net increase of $381 million sugar exports in Jul-Mar is one fifth of incremental exports.
The momentum may continue for couple of months; but not for long as both federal and provincial governments are thinking of reducing sugar subsidy. But that is now replacing with subsidized exports of wheat where again the government administered support prices are at premium to international market driven prices.
The government has sold 2 million tons of wheat to traders for exports at massive subsidy - 2 million tons wheat exports at around $200-250 per ton will fetch roughly $400-500 million one off exports of wheat. However, the government sold to traders at around $135-140 per ton against $295 per ton (Rs1300 per 40 KG) support price. This sums up to Rs25-35 billion one time fiscal subsidy.
The third major crop rice has a market based opportunity, without any subsidy, to capture EU banned Indian Basmati Rice market of around $200-250 million per annum. The Basmati exports in Jul-Feb stood exactly equal to sugar exports at $348 million. This makes the annualized exports at $522 million which is 40 percent of what country was getting from Basmati export a few years back. The market was captured by India and it’s time to regain the market share.
Apart from agri commodity exports opportunities and subsidies, the main stream textile exports are up by 7 percent in Jul-Mar with double digit growth in value added sectors. The need is for momentum to continue once the subsidy element is over.
The numbers are more encouraging in other manufacturing segment especially in leather, where SMEs’ exports dominate. These are low hanging fruits but their lobby is not as strong as textile counterparts, the government should facilitate them to access new markets and incentivize them to expand production capacities.
That said the balance of payment worries cannot be over just by expanding exports through subsidies mechanism. The need is to work on export competitiveness and for that, the overall domestic businesses ought to be competitive.
In the process, imports would come down as reverse of import substitution would take place.
The core of the short to medium term problems is high imports and the solution lies in how to lower these without hurting growth momentum. The need is to bring energy efficiencies and to increase speed of extracting energy from indigenous sources.
Anyhow, the import snapshot is that the bill increased by 17 percent year-on-year in 9MFY18 to stand at $40.6 billion. The currency depreciation has surely slowed down the imports growth which is redistricted to 5 percent, on quarterly basis, in 3QFY18. On yearly basis, Jan-Mar quarter increase in imports reduced to 11 percent from 16 percent and 25 percent in previous two quarters respectively.
Imports have to be tightened to control trade deficit which has worsened to $22.3 billion; up by 22 percent. The balance of goods and services worsened to $26.1 billion while the remittances covered only 56 percent of it in 9MFY18. The coverage was 71 percent in FY16 and the growing gap explains the burgeoning current account deficit.
The remittances are not likely to grow anywhere close to the growth in trade deficit. The options are either to have IMF’s stabilization policy framework to let the much needed growth to die or keep living on debt till the time the export competitiveness is reached or debt crisis emerges.