The current account deficit has emerged as a big weak spot in Asia's third largest economy since last year. It is expected to have hit about 5 per cent of GDP in the fiscal year that ended in March, but a fall in gold and oil prices along with the uptick in exports since January should take some of the pressure off.
Exports rose 6.97 per cent year-on-year in March to $30.84 billion, while imports fell 2.87 per cent to $41.16 billion, driven by lower spending on oil purchases that month, the ministry said. That reduced the trade deficit in the month to $10.32 billion.
The government of Prime Minister Manmohan Singh has been worried about the impact of falling exports on the overall economy, which likely registered its weakest growth in a decade in the last fiscal year. The trade gap has put pressure on the rupee, feeding inflation.
Exports for the full year were $300 billion, well below a $350 billion target but higher than expected. The rupee extended gains to trade at 54.12/13 as of 11.30 a.m. after the trade figures were released.
Trade Minister Anand Sharma, who gave the full year figures at a meeting of exporters, also announced incentives for external trade.
"We are conscious of the need to enhance exports so that we can address the real challenge of bringing down the trade account deficit, which directly impacts the current account deficit," Mr Sharma said.
The measures included a 2 per cent interest rate subsidy for the beleaguered textile industry, which was once a mainstay of the Indian economy but now struggles to compete with China and Bangladesh for the European and U.S. markets.
"It is a step that's come too late but is nevertheless welcome," said R.K. Dalmia, senior president of Century Textiles. "It will make sure this sector and the country's exports revive again...It's a big boost."
India imports almost all its energy needs, and spent $169 billion on foreign oil in the full fiscal year, 9 percent more than the year before, a big factor driving the current account deficit.
The annual export contraction revealed on Thursday was the first since 2009/10 and reflected falling orders from the U.S and Europe. Exports have grown in all but four years since 1970-71, Reserve Bank of India data shows.
Sharma said the government had relaxed the rules for special economic zones that have been major drivers for Indian exports in recent years. He also said he was confident a long delayed trade and investment agreement between India and Europe that is expected to significantly increase Indian exports would reach "closure" within the next couple of months.
Finance Minister P. Chidambaram said on Wednesday the current account deficit could be halved in one to two years.
"If exports rise sharply, if the oil prices soften more quickly, the current account deficit could be contained at 2.5 percent even by next year," he told reporters in New York during a visit to woo back investment in the country's ailing economy.
Copyright @ Thomson Reuters 2013