Current account deficit: Once a CAD, now a hero

Written by fe Bureau | Mumbai/New Delhi | Updated: Mar 7 2014, 00:03am hrs
CADCAD for the third qtr of the fiscal narrowed sharply to just $4.2 billion or 0.9% of GDP.
On a day the Election Commissions announcement of poll schedule virtually diminished it, the UPA government was greeted by the Reserve Bank of Indias (RBI) sanguine balance of payments (BoP) data for the December quarter. The RBI data revealed that the current account deficit (CAD) for the third quarter of the fiscal narrowed sharply to just $4.2 billion or 0.9% of gross domestic product (GDP).

Wednesdays data showed the CAD for this fiscal would be even better than finance minister P Chidambarams prediction in the recent interim budget. The CAD, which stood at a worrisome $88 billion or 4.7% of GDP last fiscal, the minister had said, would be contained at $45 billion (below 2.5% of GDP) this fiscal.

The contraction in trade deficit coupled with a rise in net invisible receipts reduced the CAD in the first nine months of FY14 to $31.1 billion or 2.3% of GDP. This, coupled with the January trade deficit of $9.9 billion (which was lower than the average in the preceding three months) and the anticipated robustness in net invisible receipts in the last quarter, could take the CAD at March-end substantially below Chidambarams forecast.

The RBI had pegged the CAD for 2013-14 to be below 2.5% of GDP.

A comfortable $8.4 billion was added to the foreign exchange reserves in April-December this year, thanks to robust accretion of $19.1 billion in the third quarter (there was a draw-down of $10.4 billion in the September quarter). This gave credence to Chidambarams assertion in the interim budget that $15 billion would be added to the countrys foreign exchange reserves by the end of the financial year. Last year too, despite the high CAD of $88 billion, $3.8 billion was added to forex reserves.

But analysts were concerned about the fact that the reduction in the CAD in the third quarter was principally due to a steep 14.8% decline in imports to $112.9 billion. Such contraction in imports has been unheard of in recent history and reflects the investment torpor in the economy. Imports have been showing negative annual growth for each month since June 2013 to January 2014.

The decline in imports allowed merchandise trade deficit to contract an annual 43% to $33.2 billion in the third quarter.

Of course, also of help was a steep (and desired) fall in gold imports helped by tax and non-tax curbs, the yellow metals imports stood at just $3.3 billion in the quarter compared with $17.8 billion in the corresponding quarter a year ago and $3.9 billion in the second quarter of the current fiscal. In January, gold imports fell an annual 77%, implying that that the imports remain curbed, although rampant smuggling of gold has been noticed in recent months.

Besides the fall in imports, an increase of 7.5% in merchandise exports to $79.8 billion also helped bring down the CAD in the third quarter. Exports are seen to pick up gradually in the coming month.

The rupee closed at 61.75 versus Tuesdays close of 61.85 per dollar

Foreign investors continued to reap good returns on investments into Indian companies and so, outflows through investment income was $6.56 billion in the quarter under review. Inflows through remittances were $15.7 billion during the quarter, largely unchanged from the previous quarter.

A large part of the accretion to forex reserves in the third quarter was because of the huge inflows garnered in NRI deposits after the RBI opened concessional swap windows for banks. NRI deposits fetched a net $21.4 billion during October-December, up from $2.7 billion a year ago.

However, dollar inflows through portfolio that comprises of equity and debt investments were a trickle at $2.4 billion. A year go, portfolio flows had been as high as $9.8 billion. Also, external commercial borrowings and bank capital saw an outflow of $1.7 billion as against an inflow of $5.75 billion a year ago.

Foreign direct investment inflows have more than doubled to $6.07 billion in December quarter compared with just $2.11 billion a year ago.

Indias foreign exchange reserves comprise foreign currency assets, gold, SDRs and reserve tranche position in the IMF. The reserves, which stood at a measly $5.8 billion at end-March 1991, rose to $315 billion at end-May 2008. The global financial meltdown and all-round economic crisis that ensued adversely impacted the reserves, which shrank to $279 billion at end-March 2010, but only to rise again to $305 billion at end-March 2011 and further to an all-time-high of $322 billion at end-August 2011. The reserves stood at $293 billion as on February 21.