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BoP: bright scene with a few dark spots financial scene

Heartening low current account deficit-to-GDP ratio

The Reserve Bank of India’s data on balance of payments for 2006-07 do not throw up any major surprises. An analysis confirms the recent emergence of certain broad trends.

One, while the merchandise trade deficit rose to $64.9 billion from $51.8 billion in 2005-06, oil imports were not the only contributor to the increase.

Exports and imports had gone up but at a slower pace. Merchandise exports, estimated at $127 billion, grew by 20.9 per cent over the previous year. The rate of growth was higher at 23.4 per cent in 2005-06. Merchandise imports rose to $191.9 billion last year but here again there was moderation in the rate of increase.

Two, non-oil imports comprising capital goods, certain types of ores and gold and silver contributed to the surge. Petroleum imports were lower than the previous year, reflecting softer global oil prices during some parts of the year.

Consequently, the trade deficit widened to $64.9 billion or 7.1 per cent of the GDP. The figure for 2005-06 was $51.8 billion (6.4 per cent of the GDP).

Three, earnings from ‘invisibles’ comprising, among others, software exports and remittances from overseas Indians, rose by 29.1 per cent during 2006-07. Software exports yielded $31.3 billion, up from $23.6 billion earlier.

Interestingly, software exports come under miscellaneous receipts and remittances under private transfers.

Remittances from overseas Indians have held steady once again to touch $28.2 billion ($24.6 billion).

Four, as noticed for some years now, services exports and remittances have helped in mitigating the impact of the merchandise trade deficit.

In fact, thanks to softer oil prices, the current account of the external sector went into a surplus during the last quarter of 2006-07. The year as a whole ended with a current account deficit of 1.1 per cent of the GDP or roughly $9.6 billion. In percentage terms, the deficit is at the same level as in the previous year.

Five, the capital account also kept with the trends in recent years, converting the BoP into a comfortable surplus. Capital inflows last year nearly doubled to $44.9 billion from $23.4 billion.

Six, a significant portion (about 36 per cent) of the capital inflows was through external commercial borrowings, which are debt - creating. The category of NRI deposits _ also debt- creating _ showed buoyancy. As for foreign direct investment, there was a distinct two way movement with large Indian investments flowing overseas. Net inflows on account of foreign institutional investors, however, were slightly lower. Many more Indian companies used the ADR/GDR route to mobilise capital.

There are a few important messages from the above data. One, the widening trade deficit cannot be checked in the near term. Oil prices are on the rise again and the strengthening rupee has started telling on export competitiveness in some sectors. IT companies are reporting lower sales realisations in rupees.

Two, the current account deficit has been kept at the same level as in the previous year thanks to sustained buoyancy in services exports and inward remittances. Almost all forecasts had spoken of a higher CAD _ 1.4 per cent of GDP and above. For countries with a capital shortage a reasonable level of CAD is preferable to a surplus.

Three, the jump in capital inflows is attributable to the country’s stable investment climate and taxation structure.

However, the rise in short-term debt in the form of ECBs and NRI deposits can become a cause for worry. There have been attempts to rein in these. NRI deposits were discouraged through lower interest rate caps.

The difficulty with ECBs is that it is often money coming in after the flimsiest of appraisals. The end use of such money is another problem area.

C. R. L. NARASIMHAN

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