India’s balance of payments position remained comfortable during 2007-08 (April-December), despite acceleration in non-oil imports growth. Merchandise exports during 2007-08 (April-February) continued to maintain the growth achieved during 2006-07 (April-February). Imports during 2007-08 (April-February) posted a high growth rate; oil imports, however, recorded a deceleration from the strong growth recorded during the corresponding period of the previous year. Net invisibles remained buoyant during 2007-08 (April-December), led by higher growth in private transfers and software services exports. Despite sharp rise in trade deficit, the surplus on the invisibles account helped in containing the current account deficit, although it remained at a higher level than in the comparable period of 2006-07. Net capital inflows were substantially higher than those in the corresponding period of 2006-07. India’s foreign exchange reserves increased by US $ 110.5 billion during 2007-08.

International Developments

The global economy expanded by 4.9 per cent in 2007 as against 5.0 per cent in 2006. After a stronger than expected growth in the third quarter of 2007, growth in most of the advanced economies decelerated sharply in the last quarter of 2007, mainly on account of the financial crisis that has spread beyond the US sub-prime mortgage market. In contrast, emerging and developing economies continued to grow above the trend, despite some slackening of exports and industrial production towards the end of year (Table 55).

Going forward, the growth in global economy is projected to decelerate to 3.7 per cent in 2008 mainly on account of expected slowdown in most of the advanced economies. The overall balance of risks to the short-term global growth outlook remains tilted to the downside. Interaction between negative financial shocks and the domestic demand remains a serious downside risk for the US and to some extent in Western Europe and elsewhere. However, there is some upside potential for projected domestic demand in emerging economies. The emerging market and developing economies are expected to remain as the stabilising factor in supporting the global economy and in cushioning global downturns. So far, the spillover to emerging markets and developing countries seems relatively contained mainly because of their limited direct exposure to sub-prime related securities. Consumption activity supported domestic demand in emerging Asian economies, while export growth has begun to show some signs of moderation. The strength of domestic demand in the region combined with rising food and energy prices have led to the build-up of inflationary pressures in a number of countries in emerging Asia. Apart from the possibility of further credit crunch, downside risks to global growth include contagion from the likely US recession, increased inflationary pressures driven by rising food and energy prices, and persisting global imbalances.

The IMF has projected the US economy to grow by 0.5 per cent in 2008 (2.2 per cent in 2007). The US growth prospects would hinge upon the future course of the housing correction, the extent of financial sector dislocation, and the ensuing impact on household and business finances. The Euro area is expected to grow by 1.4 per cent in 2008 (2.6 per cent in 2007) although there are increasing concerns that with spillovers from the US, tightening credit conditions and rising risk spreads may have adverse implications for domestic demand. Growth in Japan is projected to decelerate to 1.4 per cent in 2008 (2.1 per cent in 2007) on account of expected moderation in export growth and consumption. Growth projection for developing Asia is placed at 8.2 per cent for 2008 as against 9.7 per cent in 2007 (Table 56). Growth in emerging Asia during 2007 was led by China and India. Growth in China was driven by investment growth and net exports, although export growth moderated somewhat towards the end of year. GDP in China grew by 10.6 per cent in the first quarter of 2008. The IMF has projected growth in China to moderate to 9.3 per cent in 2008 (11.4 per cent in 2007).

The IMF has projected that India’s growth would moderate to 7.9 per cent in 2008 from 8.7 per cent in 2007 (April-March). The moderation in growth of the Indian economy, however, is projected to be of a lower order in 2008 in comparison with several advanced economies and other emerging market economies. Also, India’s growth would remain the highest among the major emerging economies, after China.

According to the IMF projections, growth in world trade is expected to moderate to 5.6 per cent in volume terms in 2008 from 6.8 per cent in the preceding year (Table 56). Exports of other emerging market and developing countries are projected to grow by 7.1 per cent in 2008 (8.9 per cent a year ago), while those of advanced countries are expected to grow by 4.5 per cent (5.8 per cent a year ago).

World exports (in US dollar terms) in 2007 (January-December) posted a growth of 15.0 per cent, lower than 15.3 per cent in 2006. Exports of industrial countries in 2007 increased at a higher rate of 13.6 per cent than 12.4 per cent in 2006. On the other hand, export growth of emerging and developing economies was lower at 16.8 per cent during 2007 than 19.1 per cent in 2006 (Table 57).

According to the World Trade Organization (WTO) Report released recently, world merchandise trade growth declined to 5.5 per cent in 2007 (lower than 6.0 per cent forecast in April 2007) from 8.5 per cent in 2006, and may grow even more slowly in 2008 at about 4.5 per cent. Sharp economic deceleration in key developed countries is expected to be only partly offset by continuing strong growth in emerging economies. Assuming a basic scenario of global GDP growth between 2.5 per cent and 3 per cent, global merchandise trade, according to the WTO, is expected to slow down to about 4.5 per cent in 2008, or about 1 percentage point lower than in 2007. The global economy and world trade started to slow down in 2007 due to the deceleration of demand in the developed regions. Developing countries’ share of world merchandise trade (exports plus imports) reached a new record level of 34 per cent in 2007. Developing countries and Commonwealth of Independent States (CIS) region are expected to record faster growth in imports than exports; together they are expected to contribute more than one half of global import growth in 2008.

Merchandise Trade

According to the provisional data released by the Directorate General of Commercial Intelligence and Statistics (DGCI&S), India’s merchandise exports recorded a growth of 22.8 per cent during 2007-08 (April-February), as compared with 23.2 per cent growth posted during the corresponding period of 2006-07, thereby maintaining the momentum. Growth in imports at 30.1 per cent was higher than 25.2 per cent recorded a year ago (Chart 44). Non-oil imports, which recorded a substantial increase of 31.8 per cent (22.6 per cent a year ago), contributed about 72 per cent to overall import growth. Oil imports during April-February 2008 showed a deceleration in growth (26.4 per cent as against 31.2 per cent in April-February 2007). Merchandise trade deficit during April-February 2008 aggregated US $ 72.5 billion, an increase of US $ 23.1 billion over a year ago (US $ 49.4 billion).

Commodity-wise data available for April-December 2007 show that all major commodity groups, barring agricultural and allied products, ores and minerals, and gems and jewellery group recorded deceleration. Agricultural and allied products, petroleum products, engineering goods, and gems and jewellery were the main drivers of export growth, as these product groups together constituted about 70 per cent of the overall export growth (Table 58). Growth of manufactured goods in general moderated, as most of the principal components such as engineering goods, chemicals and related products, textiles and textile products, leather and manufactures exhibited lower growth rates. Exports of petroleum products increased at a lower rate of 37.3 per cent as compared to 74.6 per cent during April-December 2006. Non-oil exports, however, posted a higher growth rate of 21.6 per cent than 18.7 per cent recorded in April-December 2006.

Destination-wise, the US continued to be the single largest market for India’s exports during 2007-08, although its share declined from 15.3 per cent in April-December 2006 to 13.4 per cent in April-December 2007. The US was followed by the UAE (10.1 per cent), China (6.0 per cent), Singapore (4.5 per cent) and the UK (4.3 per cent). Among the major regions, India’s exports to European Union (EU) and Asian developing countries showed accelerated growth, while exports to North America and the OPEC decelerated during April-December 2007 (Table 59).

Commodity-wise details on imports available for April-December 2007 revealed that capital goods, and gold and silver were the main contributors of growth in non-oil imports. Capital goods increased by 31.6 per cent, while imports of gold and silver increased by 34.4 per cent over April-December 2006. Non-oil imports, net of gold and silver, increased at an accelerated pace of 29.2 per cent (22.5 per cent during April-December 2006). Among other non-oil products, imports of pearls, precious and semi-precious stones, chemicals, and iron and steel showed accelerated growth during the period (Table 60).

Source-wise, China was the major source of imports accounting for 11.5 per cent of total imports (oil plus non-oil imports) during April-December 2007. The other major sources of imports were Saudi Arabia (7.8 per cent), the US (5.8 per cent), the UAE (5.6 per cent), Switzerland (4.6 per cent), Iran (4.2 per cent) and Germany (3.9 per cent).

India’s exports have shown an average growth of 25.6 per cent during the period 2004-05 to 2006-07. It has maintained the growth momentum during 2007-08 with exports recording 22.8 per cent growth during 2007-08 (April-February). This, to an extent, reveals the terms of trade effect emanating from relatively high export prices realised vis-à-vis import prices. During 2004-05 to 2006-07, the unit value index of India’s exports, on an average, increased by 8.7 per cent as compared with 4.6 per cent for imports. As a result, net terms of trade in favour of exports (unit value index of exports as percentage of unit value index of imports) increased by 5.6 per cent during this period. The improvement in net terms of trade was on account of realisation of higher export prices for commodities such as cereals, ores and minerals, iron and steel, non-ferrous metals and petroleum products- an outcome of surge in global commodity prices.

Trade deficit during April-February 2008 widened to US $ 72.5 billion, from US $ 49.4 billion a year ago (Table 61). The trade deficit on the oil account increased by US $ 5.2 billion during April-December 2007 to US $ 34.7 billion while non-oil trade deficit increased by US $ 10.4 billion to US $ 24.0 billion.

Current Account

Net surplus under invisibles (services, transfers and income taken together) was higher at US $ 50.5 billion in April-December 2007 as compared with US $ 36.3 billion in April-December 2006, reflecting mainly the rise in remittances from the overseas Indians and software services exports (Table 62). Growth in invisible receipts as well as invisible payments decelerated in April-December 2007 mainly on account of deceleration in exports of software and business

services. The major components of invisible payments were travel payments, transportation, business service payments such as business and management consultancy, engineering and other technical services, and dividend and profit payments.

The net invisible surplus offset a large part of the trade deficit (75.9 per cent) during April-December 2007, thereby containing the current account deficit at US $ 16.0 billion during April-December 2007 (US $14.0 billion in April-December 2006) (Chart 45 and Table 63). Net of remittances, the current account deficit was US $ 43.9 billion during April-December 2007 (US $ 33.5 billion a year ago).

Capital Flows

During the financial year 2007-08 so far (up to February 2008), foreign investment of various components in India recorded increased inflows. The inflows under foreign direct investment (FDI) were US $ 25.5 billion during 2007-08 (April-February) as against US $ 19.6 billion during the corresponding period of the previous year (Table 64). FDI was channelled mainly into manufacturing industries (20.1 per cent), followed by financial services (18.7 per cent) and the construction sector (14.7 per cent). Source-wise, Mauritius, remained the main source of FDI to India during April-February 2007-08, followed by Singapore and the US.

Net inflows by foreign institutional investors (FIIs) aggregated US $ 20.3 billion during the financial year 2007-08. The number of FIIs registered with the SEBI increased from 997 by end-March 2007 to 1,319 by March 31, 2008. Capital inflows through American depository receipts (ADRs)/global depository receipts (GDRs) were US $ 8.7 billion for 2007-08 (April-February).

During the year 2007-08 (April-December), the inflows (net) under external commercial borrowings (ECBs) amounted to US $ 16.3 billion. Net short-term trade credit was US $ 10.8 billion (inclusive of suppliers’ credit up to 180 days) in April-December 2007. Out of total short-term trade credit, the suppliers’ credit up to 180 days amounted to US $ 4.2 billion during April-December 2007.

NRI deposits registered an inflow of US $ 106 million during 2007-08 (April-February). While there were net inflows under Non-Resident Ordinary Rupee (NRO) account scheme and Non-Resident External Rupee Account NR(E)RA deposits scheme, net outflows took place under Foreign Currency Non-Resident (Banks) [FCNR(B)] deposits segment.

With net capital flows being substantially higher than the current account deficit, the overall balance of payments recorded a surplus of US $ 67.2 billion during April-December 2007, substantially higher than that of US $ 16.2 billion during April-December 2006.

Foreign Exchange Reserves

India’s foreign exchange reserves were US $ 309.7 billion as at end-March 2008, showing an increase of US $ 110.5 billion over end-March 2007. The increase in reserves was mainly due to an increase in foreign currency assets from US $ 191.9 billion at end-March 2007 to US $ 299.2 billion as at end-March 2008. As on April 18, 2008, India’s foreign exchanges reserves were US $ 313.5 billion. As at end-February 2008, the outstanding net forward purchases of US dollar by the Reserve Bank were US $ 16.2 billion (Table 65).

India holds the third 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 $ 201.5 billion at end-December 2007, recording an increase of US $ 31.8 billion (18.7 per cent) over end-March 2007 (Table 66). The increase in external debt during the period was mainly on account of higher commercial borrowings, trade credit and multilateral debt. Based on original maturity, long-term debt amounted

to US $ 166.2 billion (accounting for 82.5 per cent of the total external debt) and short-term debt was US $ 35.2 billion (17.5 per cent of the total external debt). The coverage of short-term debt has been made more comprehensive with the inclusion of (i) suppliers' credit up to six months; and (ii) investment by Foreign Institutional Investors (FII) in short-term debt instruments, beginning with the quarter ended March 2005. Based on residual maturity, short-term debt (consisting of principal repayments due during one-year under medium and long-term loans, and short-term debt with original maturity of one year or less) accounted for 36 per cent of the total external debt.

The increase in outstanding debt to an extent was also due to a positive valuation impact during April-December 2007 (around US $ 6.0 billion), reflecting the depreciation of the US dollar vis-à-vis other major international currencies. About 54.5 per cent of the external debt stock was denominated in US dollars, followed by the Indian rupee (17.1 per cent), Japanese yen (11.2 per cent) and SDR (10.7 per cent). Amongst the debt sustainability indicators, the ratio of short-term to total debt increased between end-March 2007 and end-December 2007, while the ratio of short-term debt to reserves declined marginally over the same period. Foreign exchange reserves remained in excess of the stock of external debt at end-December 2007.

International Investment Position

India’s net international liabilities increased by US $ 6.4 billion between end-March 2007 and end-September 2007, as the increase in international liabilities (US $ 63.3 billion) exceeded the increase in international assets (US $ 56.9 billion) (Table 67). While the increase in the liabilities was mainly due to large capital inflows under portfolio investments, direct investments and external commercial loans, the increase in international assets was on account of an increase of US $ 48.6 billion in reserve assets between end-March 2007 and end-September 2007, followed by direct investment abroad (US $ 6.0 billion). A major part of the liabilities such as direct and portfolio investment reflects cumulative inflows, which are at historical prices.