India's trade deficit may become unsustainable

Thursday, 24 February 2011 00:00 -     - {{hitsCtrl.values.hits}}

NEW DELHI: The Indian government on Wednesday flagged "serious concern" over a trade deficit that could jump nearly 2.5 times to $278.5 bn in three years and may cause an unsustainable current account deficit .

Asia's third-largest economy could see its trade deficit widen to 12.8 percent of GDP by 2014 from 7.2 percent in this fiscal year on current trends, leading to a higher reliance on foreign capital inflows to plug the current account gap, a trade ministry document showed.

"The projected BoT (balance of trade) deficit on merchandise account of 13 percent is clearly cause for serious concern because it can lead to an unsustainable CAD (current account deficit)," the document published on Wednesday said.

India is on track to exceed a 15-percent export growth target in this financial year ending March as the country pulls away from the global economic slowdown, which sapped demand from many traditional export destinations in the United States and Europe.

While IT and service exports have played a huge role in India's economic boom, merchandise exports have lagged behind the potential of the world's second-fastest growing major economy, which is seen returning to pre-crisis growth rate of 9 percent soon.

"Services earnings will most certainly grow over the next few years. However, it is unlikely that even their growth can sustain a ballooning of the BoT deficit to the size of 13 percent of GDP."

"A large widening of the trade deficit can potentially result in payments difficulties," the document said