FM draws comfort from lower CAD, higher PMI

Written by fe Bureau | New Delhi | Updated: Dec 3 2013, 10:58am hrs
AMID the gloom that continues to pervade the economy, finance minister P Chidambaram on Monday sought to take heart from some data points that looked positive, especially the sharp decline in the current account deficit (CAD) to $5.15 billion or 1.2% of GDP in the September quarter.

Government managers said strong exports, a deceleration in imports and likely status-quoist flows of invisibles might lead to the CAD in the third and fourth quarters of this fiscal to be not much higher than the Q2 level. With the first-half CAD, as per RBI data released on Monday, at $26.9 billion, deficit for the full year would likely be contained below $45 billion, they say.

CAD stood at $88.2 billion or 4.8% of GDP in FY13. The deficit was $22 billion or 4.9% of GDP in Q1 FY14.

The concern, however, was that despite the remarkably low CAD, there was a $10.7-billion depletion of forex reserves in the first half of this fiscal. The draw-down was due to aggressive FII selling of debt, higher levels of repayment of overseas borrowings by banks and a sharp decline in trade credits and advances. Obviously, the government will have to be aggressive about the planned quasi-sovereign bond issues to keep the net capital flows robust in H1. Chidambaram recently said that the country would be prepared to deal with any impact of the US Federal Reserves gradual stimulus withdrawal.

The minister, who a few days ago said CAD for FY14 could be better than the $56 billion forecast by the RBI, however, chose to be wary after the release of Q2 data.

Chidambaram said that clearly, the balance of payment position has improved significantly on quarter-on-quarter and half year-on-half year. On the current account, the net deficit has narrowed from $21 billion in the second quarter of last fiscal to $5.2 billion in the second quarter of this year. These are good signs. We will contain CAD at the targeted level despite some concerns expressed in some quarters, he said.

The Q1 trade deficit was $33 billion as compared to $50.5 billion in Q2 and $45.6 billion in Q4 last fiscal. This trend is likely to be sustained in the short-term, trade experts say. (Exports rose 13.47% to $27.3 billion in October, the highest growth rate in two years and imports dipped by 14.5% $37.8 billion, leaving a trade deficit of $10.56 billion, as compared to $20.2 billion in October 2012). Gold imports plunged from $16.5 billion in Q1FY14 and $15.8 billion in Q4FY13 to a mere $3.9 billion in Q2FY14.

Despite the rupee being weaker than H2 of last fiscal, a relative respite in global crude oil prices moderated the oil import bill in Q2 to $41 billion from $42 billion in Q1. These imports stood at close to $45 billion in the previous two quarters.

Net services exports stood at $18.4 billion in Q2, higher than $16.9 billion in the previous quarter. While software services remained steady, the second quarter saw a strong show by the financial services sector, with a net inflow of $741 million compared to net outflow of $591 million in Q1 (net change over the quarter is $1.3 billion) and stronger exports of transportation and communication services. But a sharp increase in income outflows ($6.3 billion in Q2 as compared to $4.8 billion in the previous quarter) contained net invisibles inflows at $28.1 billion in Q2, a tad lower than $28.7 billion in Q1.

Private remittances, another major source of inflows, remained almost as robust in Q2 as in Q1. The inflows on this account were $16.3 billion in Q2 , as compared to $16.8 billion in Q1, adding up to H1 inflows of $33 billion. Remittances are poised to be a couple of billion dollars or so more than the FY13 figure of $64 billion in the current fiscal.

Income outflows mostly repatriation of profits but including salary transfers stood at $11 billion in the first half, indicating that these outflows in FY14 would be close to the $22.4 billion recorded in FY13.

While FDI recorded net inflows of $6.9 billion in Q2 as against $6.5 billion in Q1, net portfolio investment registered an outflow of $6.6 billion in Q2 owing to FIIs aggressive selling of debt after the US Federal Reserve hinted at the tapering of its quantitative easing. In the June quarter, the FII inflows and outflows had more or less evened out.

Overseas loans by banks saw a net outflow of $6.7 billion in Q2 owing to repayments and a build-up of the banks overseas foreign currency assets. Short-term credit witnessed net outflow of $1.9 billion in Q2 as against net inflow of $2.5 billion in the previous quarter.

Chidambaram said the country would achieve an economic growth rate of 5% this fiscal. Chidambaram cited comfortable foreign exchange reserves, narrowing of CAD and signs of improvement in tax collection to drive home the point that the second half of the financial year has started on a positive note.

Chidambaram is confident the government will also meet the fiscal deficit target of 4.8% of GDP although comparison of expenditure and receipts at the end of every month so far had given a not-so-accurate picture. Expenditure is front loaded, while revenue is usually backloaded. I have looked at these numbers for a number of years. I am familiar with the pattern. We will contain fiscal deficit at 4.8% of GDP, he said.