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

dominant explanation.

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

the outcome.

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

misalignment.

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.

Ila Patnaik

(The author is at ICRIER. These are her personal views.)