NEW DELHI: The Prime Minister's Economic Advisory Council (EAC) has said that although it is appropriate for an economy of India's size with vast investment requirements to be running a current account deficit (CAD), its size and composition — projected at 2.9 per cent of the country's GDP (gross domestic product) for 2005-06 — "warrant continuous monitoring.''

In its report on Balance of Payments (BoP) presented to Prime Minister Manmohan Singh, the EAC noted that the CAD, at almost three per cent of the GDP, "may still be in the comfort zone provided it goes to finance productive investment.''

The Council pointed out that there was a growing divergence between the trade data as reported by the Reserve Bank of India (RBI) and as compiled by the Directorate General of Commercial Intelligence and Statistics (DGCIS). Citing an instance, it said that during the current year, trade deficit as per the DGCIS data is projected at 5.2 per cent of the GDP as against 7.7 per cent under the BoP data, thereby widening the divergence to 2.5 percentage points of the GDP.

If the CAD is calculated using the DGCIS trade data, it would amount to only 0.3 per cent of the GDP as compared to 2.9 per cent under the RBI data. The divergence, particularly in import figures, could be due to one-off payments for defence and civilian aircraft imports, the Council said: "It may be useful to be as transparent as possible in the published data in the public domain so as to manage expectations on the BoP outlook which is important to inspire the trust and confidence of potential investors, both domestic and foreign."

Explaining the reasons for the difference, the Council noted that there has always been a divergence between the merchandise trade data of the DGCIS and BoP (RBI) data owing largely to three important reasons.

"First, DGCIS tracks physical imports and exports while the BoP data tracks payment transactions relating to merchandise trade.

Second, Government imports, which are exempt from customs duty, fail to be captured by the DGCIS data. Defence imports fall into this category. Third, DGCIS does not capture imports that do not cross the customs boundary (example: oil rigs, some aircraft) while they are still paid for and enter the BoP data,'' it said. Invisibles continue to be buoyant. The larger estimated outflow under investment income this year compared to last year, partly owing to the payout of accumulated interest on India Millennium Deposits (IMD) in December 2005, would be more than offset by increases in software exports and remittances. Indeed, net invisibles are projected to increase from 4.5 per cent of the GDP last year to 4.8 per cent of the GDP this year, the Council said.

As a proportion of GDP, capital flows are slated to decline marginally from 4.5 per cent to 4.1 per cent. "Nevertheless, they are likely to be large enough in 2005-06 to fully bridge the current account deficit and leave a margin of $10.7 billion on top of that as net accretion to reserves,'' the report said.

Printer friendly page  
Send this article to Friends by E-Mail