The resultant trade deficit of $4.7bn, thus, was 7 per cent lower than in the first half of 1999-00. For the first five months of the year, it appears that all key manufacturing sectors - textiles, apparel, chemicals, gems and jewellery, leather products and engineering products - have done rather well. Exports to both traditional and new markets have grown. Exports to the US are up 19 per cent, to the European Union 16 per cent, to Japan 19 per cent and to South East Asia 10 per cent. Most notable however is the 28 per cent rise in exports to China and Hong Kong and the nearly 50 per cent increase to Brazil, Chile and Mexico.

It is doubtful if the weakening of the rupee since May had much to do with export growth that has anyway been in strong evidence ever since the summer of 1999. A weaker rupee however appears to have successfully compressed non-oil imports. While in Q-1, non-oil imports rose by 11 per cent, they declined by 13 per cent in Q-2. The impact on non-oil/non-gold imports was even sharper. In Q-1 non-oil/non-gold imports rose by 18 per cent, while in the first two months (July-August) for which data is available, they fell by 12 per cent.

Consequently, the trade deficit for Q-2 was reduced 31 per cent to $1.7bn. Net invisible earnings (including software and private remittances) in Q-1 of this year showed a small decline. The current account deficit (CAD) at $2.5 bn was thus 40 per cent higher than in Q-1 of last year, caused in large part by the increase in the oil import bill, the factor responsible for much of the uncertainty in the currency markets through the summer of this year. The CAD outlook for the completed Q-2 and for the second half (H-2) of this fiscal however looks very much better.

For Q-2, taking net invisible earnings at slightly lower than last year, the CAD is likely to be of the order of $1.6 bn. We are assuming that the difference between balance of payments (BoP) imports and DGCI&S (Directorate General of Commercial Intelligence and Statistics) imports remain at last year's level. We thus get a CAD for H-1 of 2000-01 of $4bn.

We have made some working assumptions for H-2 of 2000-01. That crude oil will remain at around $30 per barrel. That export growth will slow down to 7.5 per cent; and that non-oil imports which fell by 2 per cent in the first half, will grow by 7.5 per cent in the second. By this reckoning, in H-2, the oil import bill would be $10 bn, and the merchandise trade deficit about $12 bn. If net invisible earnings remain unchanged at last year's second-half level, that is, at $8.25bn, the CAD for H-2 of 2000-01 would be $3.75bn, and the aggregate CAD for the year would be below $8bn, that is 1.6 per cent of GDP. That seems to be a worst case scenario.

But things could get better. Net invisible earnings receipts in H-2 of 1999-2000 had jumped by over $4bn or 97 per cent. The increase had come primarily from software service exports and private remittances. The software industry's own assessment of export earnings prospect this year is $6bn, up 50 per cent over 1999-00. In H-1 of 2000-01, the reported growth has been about this level. We choose to make the conservative assumption that in H-2 actual growth would be 20 per cent only, while net private remittances, which rose 22 per cent expansion in Q-1, would continue to expand by 20 per cent in H-2.

After allowing for some increase in counterpart debits under these heads, and some deterioration at the net balance on travel, transportation and investment income, we end up with the calculation that net invisible earning is likely to rise by over $1.2bn in H-2. For the year as a whole this modest upside picture gives us a CAD for H-2 of $2.4 billion and that for the full year of about $6.5bn (1.4 per cent of GDP). Other things remaining constant, if the 50 per cent increase in net earnings on software exports were to fructify, the CAD for H-2 could fall below $1bn, while that for the full year would be in the region of $5bn or 1 per cent of GDP. At this level, there can hardly much of an issue on the financing side.

Saumitra Chaudhuri is economic advisor to ICRA (Investment Information and Credit Rating Agency) and editor of Money and Finance, the ICRA bulletin