India’s current account deficit shrank to a more benign 1.1% of GDP in FY16 from 1.3% in the previous year despite goods exports falling consistently through the year. Low oil prices that kept imports under check helped curb the merchandise trade deficit and thereby the CAD, despite sharp declines in net services receipts and private transfers.
Net invisibles in FY16 were recorded at $108 billion, down 7% from the previous year, but the resultant strain on the CAD was more than offset by a 10% fall in merchandise trade deficit to $130 billion.
However, on a balance of payments basis, accretion to forex reserves in FY16 was just $17.9 billion against a robust $61.4 billion in FY15 as portfolio investors looked away: Portfolio investment recorded a net outflow $4.5 billion in FY16 against a net inflow of $40.9 billion in the previous year, chiefly reflecting the outflows in the debt segment.
According to data released by the Reserve Bank of India (RBI) on Thursday, the CAD narrowed in Q4FY16 to $300 million (0.1% of GDP), sharply down from $7.1 billion (1.3% of GDP) in Q3FY16 and marginally lower than $700 million (0.1% GDP) in Q4FY15. The contraction in Q4FY16 CAD was primarily due to a lower merchandise trade deficit ($24.8 billion) than in Q4FY15 ($31.6 billion) and $34 billion in the preceding quarter. Both net services receipts and private transfer receipts declined in January-March, 2016 from the previous and year-ago quarters. NRI deposits, however, increased from the previous and year-ago quarters.
Sunil Kumar Sinha, principal economist, India Ratings & Research, said: “Even as low CAD suggest stability on the external front, new pressure points have emerged. In fact, the collapse of global commodity prices, especially oil, have both advantages and disadvantages for India. The advantage is that by keeping the oil import bill lower, it kept the trade deficit under check. The disadvantage is that as the (West Asian) oil economies suffered, so was private transfers (mainly remittances by Indians) which came in at $15.689 billion in Q4FY16, the lowest in last 19 quarters.” However, with the CAD coming in at 1.1% of GDP in FY16, at an aggregate level India appears to be a net beneficiary than loser due to the collapse in the price of oil, he added.
While net FDI inflows in all of FY16 rose an annual 15.3% to $36 billion, a moderation in the inflows was seen in the last quarter of the year — to $8.8 billion from $9.3 billion in corresponding quarter in the previous year. Economic affairs secretary Shaktikanta Das tweeted, “2-16 Current Account Deficit at 1.1 % of GDP. One more robust macro economic indicator. Efforts will continue (on) the reforms front… Net FDI inflow rose by 15.3% in 2015-16 over previous year. Should be more this year due to full year impact of FDI liberalisation in Nov 2015.”
The trend of net portfolio outflows continued unabated in January-March quarter also. “Portfolio investment recorded a net outflow of $1.5 billion in Q4 of 2015-16 against a net inflow of $12.5 billion in the corresponding period of last year,” the RBI said. Since Q4FY15, when portfolio inflows stood at a robust 13.7 billion, net portfolio flows have either been negative or flat in each quarter.
India’s CAD had touched a worrisome $88.2 billion or 4.8% of GDP in FY13 due to the spike in global prices of oil and other commodities Since then, the deficit has remained at comfortable levels. The CAD stood at $26.8 billion in FY15 and $22.1 billion in FY16.