Merchandise exports, based on Directorate General of Commercial Intelligence and Statistics (DGCI&S) data, recorded a growth of 19.3 per cent during 2006-07 (April-February), lower than that of 26.3 per cent in the corresponding period of 2005-06. Growth in non-oil imports was led by imports of capital goods, indicative of strong investment demand, partly offsetting the decline in imports of pearls, precious and semi-precious stones. Growth in oil imports remained large, although there was some deceleration in consonance with the moderation in international crude oil prices. Net invisibles surplus expanded further during the first three quarters of 2006-07, benefiting from continued growth in exports of services and remittances, and financed a large part of the deficit on the merchandise trade account. The current account deficit was marginally lower than a year ago. Capital flows were substantially higher, led by foreign direct investment (FDI) flows and supported by foreign institutional investors (FIIs) flows and debt flows (external commercial borrowings and nonresident deposits). Outward FDI flows associated with acquisitions by Indian corporates abroad also increased. Capital flows (net) more than financed the current account deficit, resulting in the net accretion of US $ 47.6 billion in foreign exchange reserves during 2006-07.

International Developments

Global economic growth at 5.4 per cent during 2006 (4.9 per cent in 2005) turned out to be stronger than expected, led by a broad-based upswing in advanced economies and rapid growth in the emerging market economies. After a strong first quarter, economic activity in the US slowed down on the back of a significant weakening of the housing market. Nonetheless, for the year 2006, as a whole, economic growth in the US was marginally higher than in 2005. The economic activity in the euro area accelerated to 2.6 per cent – the highest since 2001– led by strong domestic as well as external demand. The Japanese economy expanded at a higher rate than in 2005. Growth momentum remained strong in China, India and other emerging economies as well (Table 51). Developing Asia recorded a growth of 9.4 per cent during 2006, the highest since 1995.

According to the International Monetary Fund (IMF) projections, the global economy is likely to maintain its run of strong growth during 2007, though with some loss of momentum (4.9 per cent from 5.4 per cent in 2006) (Table 52). There are also some downside risks to global growth prospects. These include revival of inflationary pressures in view of narrowing output gaps, the possibility of renewed oil price rise, sharper slowdown in the US economy in case the housing

sector continues to deteriorate, financial market volatility and possible disorderly adjustment of global imbalances.

Global merchandise trade grew at a robust pace in 2006 benefiting from favourable economic conditions, high commodity prices and recovery in global investment. Exports of developing countries, notwithstanding some deceleration, continued to post a higher growth in comparison with industrial countries (Table 53).

Merchandise Trade

According to the provisional data released by the Directorate General of Commercial Intelligence and Statistics (DGCI&S), India’s merchandise exports during April-February 2006-07 registered a growth of 19.3 per cent as compared with 26.3 per cent a year ago. The export growth was strong in the first half (April-September 2006) of the fiscal at 27.2 per cent, but decelerated to 14.3 per cent during October 2006-February 2007 (Chart 54).

Commodity-wise data available for April-November 2006 reveal that engineering goods and petroleum products were the major growth drivers, together contributing almost 64 per cent of the export growth during this period. Gems and jewellery, textiles, and ores and minerals, on the other hand, showed decline or deceleration in exports (Table 54). Agriculture and allied products posted strong growth, driven mainly by the increase in the exports of sugar and molasses and raw cotton. Traditional export items like tea, coffee, tobacco and spices also maintained high growth, while exports of rice, wheat, cashew and marine products declined or decelerated.
The US continued to be the major destination of India’s exports with a share of 15.4 per cent in 2006-07 (April-November) followed by the UAE (9.9 per cent), China (5.9 per cent), Singapore (5.2 per cent) and the UK (4.5 per cent)

(Table 55). Among the major countries, growth in exports to the UAE accelerated to 57.4 per cent from 22.3 per cent a year ago. On the other hand, growth in exports to China, Singapore and Hong Kong decelerated.

India’s merchandise imports registered a growth of 27.8 per cent during April-February 2006-07 on top of 32.7 per cent growth a year ago. After showing a slowdown in the latter half of 2005-06, non-oil imports have picked up since

September 2006 (Chart 55). During April-February 2006-07, non-oil imports grew by 25.7 per cent and accounted for almost 64 per cent of the rise in total imports.

Major import items like capital goods maintained high growth during April-November 2006, while imports of mainly export related items, particularly, pearls, precious and semi-precious stones declined (Table 56). Imports of capital goods increased by 38.2 per cent during April-November 2006, over and above

the growth of 45.7 per cent recorded a year ago, reflecting the continued buoyancy in domestic investment activity. Imports of gold and silver registered a sharp jump during September-November 2006, offsetting the decline during April-August 2006. As a result, the cumulative growth was 21.3 per cent during April-November 2006.

Oil imports during April-February 2006-07 rose by 32.6 per cent on top of 49.7 per cent a year ago, reflecting partly the increase in volumes. In volume terms, oil imports increased by 22.5 per cent during April-November 2006 as compared with a growth of 0.8 per cent a year ago. Growth in the Indian basket of crude oil prices, on the other hand, decelerated to 12.7 per cent during 2006-07 from 42.3 per cent during 2005-06.

Source-wise, during April-November 2006, China was the major source of imports with a share of 9.3 per cent in India’s total imports, followed by Saudi Arabia (7.9 per cent), the US (5.8 per cent), Switzerland (4.9 per cent) and the UAE (4.7 per cent).

Trade deficit at US $ 55.8 billion during 2006-07 (April-February), according to the DGCI&S data, was higher by 48.5 per cent than the previous year (US $ 37.6 billion) (Table 57). The deficit on the oil account increased by US $ 6.0 billion during April-November 2006 over the corresponding period of 2005, while the non-oil trade deficit increased by US $ 3.0 billion.

Current Account
Buoyant net surplus under invisibles (services, transfers and income taken together) continued to finance bulk of the trade deficit during 2006-07 (April-December). Amongst major services, net surplus under software services increased by 29.1 per cent to US $ 20.1 billion during April-December 2006 (Table 58). Private transfers (net) at US $ 18.8 billion during April-December 2006 were 11.6 per cent higher than a year ago. Investment income deficit narrowed from a year ago, on account of higher earnings on India’s external assets. On balance, the net surplus under invisibles increased to US $ 40.5 billion during April-December 2006 from US $ 28.1 billion a year ago.

The net invisible surplus financed 77.4 per cent of the merchandise trade deficit during April-December 2006. Current account deficit at US $ 11.8 billion in April-December 2006 was marginally lower than that in the corresponding period of the previous year on account of higher net invisibles receipts (Table 59 and Chart 56).

Capital Flows

Capital flows during 2006-07 were substantially higher than a year ago, led by foreign direct investment (FDI) flows, on the back of strong growth prospects and buoyant investment demand. FDI inflows at US $ 16.4 billion during April-January 2006-07 were substantially higher than the inflows in the corresponding period of the previous year (Table 60). FDI was channelled mainly into financial services, manufacturing, banking services, information technology services and construction. Mauritius, the US and United Kingdom remain the dominant sources of FDI to India. Outward direct investment from India also exhibited a significant rise to US $ 8.7 billion during April-December 2006 from US $ 1.9 billion a year ago due to some large overseas acquisitions by Indian corporates. Both FDI inflows

and outflows include one transaction amounting to US $ 3.1 billion involving swap of shares. Net of this transaction, FDI inflows and outflows were US $ 13.3 billion and US $ 5.6 billion, respectively, also indicating a significant increase over the previous year.
Portfolio equity inflows by foreign institutional investors (FIIs) were lower than a year ago due to outflows witnessed during a few months on the back of global developments such as meltdown in global commodities and equity markets (May-July 2006), fall in Asian equity markets subsequent to the tightening of capital controls by Thailand (December 2006) and fall in Asian equity markets on account of concerns of slowdown in the US economy (late February 2007). Capital inflows through the issuances of American depository receipts (ADRs)/Global depository receipts (GDRs) during April-January 2006-07 remained higher than in the previous year.

Amongst debt flows, demand for external commercial borrowings (ECBs) remained strong in consonance with buoyant domestic investment activity. Net disbursements under ECBs during April-December 2006 were more than double of those a year ago. Net inflows under various NRI deposits during April-January 2006-07 were also more than twice that a year ago, partly attributable to higher interest rates on various deposit schemes up to January 2007. The ceiling interest rate on NRE deposits was raised by 25 basis points each in November 2005 and April 2006 before being scaled down by 50 basis points to “LIBOR/SWAP rates of US dollar plus 50 basis points” in January 2007. The ceiling interest rate on FCNR(B) deposits was raised by 25 basis points to “LIBOR/SWAP rates for the respective currency/ maturity” in March 2006 but was reduced by 25 basis points to “LIBOR/ SWAP rates minus 25 basis points” in January 2007.

Foreign Exchange Reserves

India’s foreign exchange reserves were US $ 199.2 billion as on March 31, 2007, showing an increase of US $ 47.6 billion over end-March 2006 levels (Table 61). The increase in reserves was mainly due to increase in foreign currency assets from US $ 145.1 billion at end-March 2006 to US $ 191.9 billion as at end-March 2007. As on April 13, 2007, India’s foreign exchange reserves were US $ 203.1 billion.

India holds the fifth largest stock of reserves among the emerging market economies. The overall approach to the management of India’s foreign exchange reserves in recent years reflects the changing composition of the balance of payments and the ‘liquidity risks’ associated with different types of flows and other requirements. Taking these factors into account, India’s foreign exchange reserves continued to be at a comfortable level and consistent with the rate of growth, the share of external sector in the economy and the size of risk-adjusted capital flows.

External Debt

India’s total external debt was placed at US $ 142.7 billion at end-December 2006, an increase of US $ 16.2 billion over end-March 2006. The increase during the period was mainly on account of higher external commercial borrowings and NRI deposits. As noted earlier, higher commercial borrowings could be attributed to sustained investment and import demand, while the rise in NRI deposits was partly on account of higher interest rates on these deposits for the period. Almost 46 per cent of the external debt stock was denominated in US dollars followed by the Indian Rupee (19 per cent), SDR (14 per cent) and Japanese Yen (12 per cent). Sustainability indicators such as the ratio of short-term to total debt and short-term debt to reserves remained almost unchanged between end-March 2006 and end-December 2006 and continued to be at quite low and comfortable levels (Table 62). Foreign exchange reserves remain in excess of the stock of external debt.

International Investment Position

India’s international assets increased by US $ 16.4 billion during the half year ended September 2006 over end-March 2006 levels, mainly on account of an increase in reserve assets. India’s direct investment abroad also maintained its rising trend, reflecting growing investment interest by Indian companies in the overseas markets. International liabilities of the country expanded by US $ 14.5 billion between end-March 2006 and end-September 2006, reflecting inflows on account of direct and portfolio investment, recourse to commercial borrowings and non-resident deposits. As the increase in international assets exceeded that in international liabilities during the period, India’s net international liabilities declined by US $ 1.9 billion between end-March 2006 and end-September 2006 (Table 63).