India needs a tight vigil on BoP

Written by Mathew Joseph | Updated: Jun 10 2014, 09:44am hrs
For an economy in deep trouble for some time now, the sharp turnaround in Balance of Payments (BoP) has been a great relief. The current account deficit (CAD) improved remarkably from an unprecedented 4.7% of GDP in 2012-13 to 1.7% in 2013-14. This is the best performance of Indias BoP since 2007-08 when the CAD had been just 1.3% of GDP. Can we now assume that we have finally tamed the BoP beast once and for all

For India, the current account of its balance payments is the result of a tug of war between the merchandise and invisibles trade accounts. The former has always been in deficit and the merchandise trade deficits steadily widened from 2-2.5% of GDP in the early 2000s to above 5% in the mid-2000s, above 8% in the late 2000s and climbed above 10% of GDP in early 2010s (see chart). In the last year, we saw the merchandise trade deficit falling to below 8% of GDP.

On the other hand, the invisibles account (which consists of services, transfers and factor incomes) has always been in surplus and the surplus increased from about 2-3% of GDP in the early 2000s to 4-5% in the mid-2000s, to above 6% in late 2000s and continued at that level since then.

reflect bop

The improvement in BoP last year occurred mainly because of the large reduction in merchandise trade deficit from 10.5% of GDP in 2012-13 to 7.9% in 2013-14. There has been only marginal improvement in the invisibles surplus from 5.8% of GDP to 6.2% in this period.

Looking more closely, the fall in trade deficit in the last year has been more because of a sharp fall in non-oil merchandise imports (by about 11%) than a rise in exports (about 4%). This is a reflection of two things: the slowdown in the economy and the stringent restrictions on the import of gold and silver. The value of imports of gold and silver declined by a whopping 40% in 2013-14 to $33.4 billion from $55.8 billion in 2012-13. Capital goods imports declined by over 15% from $58.6 billion to $49.6 billion, which reflected the stagnant investment climate in the economy. The low growth in exports reflected the continued sluggish growth in the global economy.

The remarkable improvement in Indias BoP in 2013-14 is on account of special circumstances which are to change going forward. The economy is expected to improve with the policies of the new government. Import restrictions on precious metals may be relaxed. The rupee is appreciating and that could impact export growth. Therefore, we cannot take the improvement on the external sector for granted. Continued vigil on Indias BoP is warranted.

The author is professor at Rajagiri Business School, Kochi.

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