Signs of revival: Evidence from imports
by Ila Patnaik. (This column appeared in moneycontrol.com in Jan 2003)
Is the Indian economy showing signs of revival? Every little piece of
evidence that suggests that growth is looking up helps to generate
optimism and improve confidence.
In thinking about growth in the Indian economy this year, the big
question is that of the impact of the monsoon. It was mainly the
differences of opinion about the impact of the monsoon that led to
growth forecasts for the economy varying from 3 per cent to over 5 per
cent. The Kharif crop is showing a 19% drop in foodgrains, a 25% drop
in oilseeds, a 5% drop in sugarcane and a 22% drop in cotton.
The bad monsoon is expected to hurt GDP directly through lower
agricultural output, and it is expected to hurt industry and services
indirectly through its impact on consumer spending of agriculturists.
The early months of this year have shown surprisingly good output
growth. But this is partly because the impact of the poor south-west
monsoon would show up from October onwards, in the period of the
Kharif harvest. Hence, the most important thing to track in the Indian
economy this year is the performance from September to December.
Imports are one piece of this puzzle. Imports growth has been sluggish
for an extended period, reflecting weak domestic demand. In the first
four months of the year, we saw dollar imports grow by 1.6%, -0.4%,
0.2% and -5.0%. This is a picture of sluggish imports growth.
Then, in August, imports grew by 11.1%. In September and October, we
have seen remarkable growth of 30.9% and 32.9%. This is a surprising
and important new development. Though a part of the sharp rise in
growth is the low base effect as trade had fallen sharply in the
months of September and October last year due to the September 11
attacks, the is still a significant increase in growth. In September
and October, imports exceeded $5 billion a month (the first time
Indian imports crossed $5 billion in a single month).
Was it simply caused by a rise in oil prices? This appears to be true
in part. Over April-October, overall imports grew by 12.5%, but
Non-POL imports (which account for two-thirds of imports) grew by
10.1%. Hence, while the rise in oil prices mattered, it is not the
Was it a rise in exports of import-intensive goods, such as gems and
jewellery? The data shows that in September and October, exports only
grew by 7.8% and 9.9%, and that they do not constitute an acceleration
in exports growth. Hence, this explanation does not seem to explain
We may hence tentatively suggest that the imports growth of September
and October this year suggests surprisingly good strength of domestic
demand and of a smaller impact of the poor monsoon on the Kharif
harvest and purchasing power.
This sharp imports growth also has consequences for the currency
market. These two months have experienced a trade deficit of $1.1
billion and $1.4 billion respectively. One of the consequences of low
import growth has been the higher supply of dollars in the forex
market and a pressure on the rupee to appreciate. To keep the rupee
competitive the RBI has been buying up dollars and accumulating
foreign reserves even after the level of reserves has been assessed
to be adequate. Higher imports, therefore, not only indicate that the
demand in the economy may be picking up, they also help correct future
demand imbalances that may be created because of currency
The data shows some evidence of this also. Reserves accumulation over
September and October was $2.5 billion, whereas in the preceding two
months it was $3.6 billion.
In summary, there is something interesting and important going on in
terms of the imports data of September and October of this year. This
is one of the first indicators that is released, which gives us some
sense of demand growth in the domestic economy. This data suggests
that the poor Kharif crop has done less harm to growth this year than
might otherwise have been expected.
(The author is at ICRIER. These are her personal views.)Ila Patnaik