This would imply that in periods of rising demand, firms would accumulate inventories of imported components and intermediates. Given the fact that components and spares for capital are included in the "capital goods" category in import data, periods of such accumulation of inventories would also be periods in which the imports of "capital goods" would register an increase. The years 1994-95 to 1996-97 were years when as a result of the release of the pent-up demand for import-intensive manufactured goods, there was a "min-boom" in industry, which would have resulted in a sharp increase in capital goods in the forms of components of various kinds. In fact, qualitative evidence suggests that there was not just such an increase, but that the expectations created by the mini-boom resulted in the excess accumulation of such inventories, which firms were hard put to reduce once the market created by a pre-existing pent-up demand was exhausted. Thus the quantum indices of capital goods provided in Chart 7, which point to a sharp increase in imports in 1994-95, reflect in all probability this tendency rather than the effects of a decline in prices. It is also not surprising, therefore, that once inventories were accumulated and demand for the final good tapered off, such imports fell sharply and stabilised at a low level. The recession rather than price has finally put restraints on the run-away increase in imports of 'capital goods'.
 
That this could be a valid explanation is suggested by the experience with Chemicals, were as Chart 8 shows, both unit value indices and prices have risen for most years during the 1990s. While the experience in 1989-90, 1995-96 and 2000-01 suggests that the import demand for chemicals is indeed price sensitive, price changes are hardly the explanation for trends in imports, which must come from the demand side.

Chart 8 >> Click to Enlarge

Import prices could, however, have had an effect on import trends in other commodities, which do not share these characteristics of capital goods or chemical imports. One such group of commodities is Food and Food Articles. As Chart 9 shows, the unit value index of Food and Food Articles rose significantly between 1990-91 and 1994-95, fell sharply thereafter till 1999-00 and rose in 2000-01. The quantum of imports on the other hand, fluctuated around a stagnant trend during the first of these periods, rose sharply between 1995-96 and 1998-99 and has fallen quite significantly over the next two years. The price elasticity of demand has possibly played a role here ensuring that imports rose only when prices were low and fell in response to price increases so as to keep prices in control. The reason why the price factor has been so important here is that "sticky" imports, which occur irrespective of the price level, are no more a major component of food imports.

Chart 9 >> Click to Enlarge
 
These "sticky" imports are primarily those made by official agencies to counter domestic shortages and the inflation they engender. Two factors have contributed to a decline in the share of such imports. First, a combination of consecutive normal or good monsoons and a slow growth in demand that has substantially eased the availability of many food items, especially foodgrains, reducing the need for imports to meet shortfalls. Second, the fact that import liberalisation has contributed to the dampening of upward movements in domestic food prices over the long run, reducing the need for anti-inflationary imports.
 
To sum up, despite liberalisation and the stagnation or slow growth of India's exports since the mid-1990s, India's balance of trade deficit has not worsened because of the sluggishness of aggregate import growth in years when oil prices have been subdued. Two factors seem to have combined to deliver this result. First, the observed price elasticity of demand for imported food and food articles, which keeps the import bill on this account under control. Second, the sluggishness in the economy in general and the industrial sector in particular after 1995-96, which has resulted in a tapering off and even decline in the demand for a range of manufactured intermediates. This has meant that the trade deficit tends to widen significantly only when oil prices rise, since the demand for oil and oil products is substantially price inelastic.
 
Thus there appear to be only two circumstances that can lead to a substantial rise in the import bill. First, a recovery and sustained growth in industrial production. And second, a sharp rise in oil prices. If either of these occurs, the trade deficit is bound to widen, unless India is able to make the breakthrough in world markets that the liberalisation was expected to deliver and has not.
 
In the meanwhile, a contained deficit, combined with large inflows of remittances, deposits, debt and investment have created a situation where India's foreign exchange reserves have increased substantially to touch the record levels at which they stand at present.