Deficits soar in Q3; forex reserves erode

Written by Economy Bureau | New Delhi | Updated: Apr 1 2009, 05:40am hrs
Indias balance of payments (BoP) position deteriorated sharply in October-December 2008, with both current and capital accounts running into deficits, although foreign exchange reserves still provided a healthy cushion. Official data released on Tuesday also showed Indias fiscal deficit had shot up to 94.1% of the revised estimates to Rs 3,07,133 crore in the first 11 months of 2008-09, much higher than the 73.4% to February 2008. The revenue deficit is also a worry, as it touched 101.3% in the same period.

Export contraction resulted in the current account deficit widening to $14.6 billion in Q3 FY09, the highest quarterly deficit since 1990, from $4.53 billion in the previous quarter. One economist estimated this is almost 5% of GDP. The surplus on the capital account, which has so far been more than sufficient to finance the deficit on the current account, also vanished due to the flight of portfolio investment from India.

At a time when international crude prices have come down sharply to $50 a barrel from the record $150 a barrel, why has Indias current account deficit shot up so significantly a senior government economist asked, requesting not to be named.

The capital account turned negative on a quarterly basis for the first time in the last ten years. It stood at -3.237 billion in Q3 FY09, compared with a surplus of $8.09 billion in the previous quarter. Gross capital inflows in the December quarter amounted to $70.0 billion, against gross outflows of $73.6 billion. The deficit on both BoP accounts also hit foreign exchange reservesused to finance these deficits--which fell sharply by $17.9 billion in the December quarter to $256 billion.

The silver lining, however, was that software exports grew 12% in Q3 FY09, while net FDI inflows and NRI deposits remained positive. NRI deposits rose to $1.04 billion in the December quarter, from $259 million in the previous quarter. Net FDI inflows tumbled to $820 million from $5.5 billion in the same period.

Meanwhile, Indias short-term debt as a proportion of total external debt also rose, finance ministry data showed. The countrys external debt nudged up 2.8% to $230.85 billion by December 2008 from $224.65 billion in September. The growth rate is sharply lower than the 5.5% registered in the July-September period.

The proportion of short-term debt to total external debt rose significantly in Q3 FY09, compared with the previous quarter, even though in absolute terms it fell by $3.2 billion during the quarter ended December to $47.48 billion. Short-term debt constituted 20.6% of total external debt in Q3 FY09, up from 16.2% in the previous quarter. Long-term debt accounted for 79.4% of total external debt in the October-December quarter, compared with 83.8% in the previous quarter.

Meanwhile, The Asian Development Bank on Tuesday projected Indian GDP to grow at 5% in calendar 2009. While highlighting that some monetary space was available, ADB said there was no further room for another fiscal stimulus. It also suggested India should return to the path of fiscal consolidation as soon as the recovery starts, which is likely in 2010.

Until January 2009, the Centres fiscal deficit stood at 163.8% of the full fisc target, but since then the fiscal deficit estimate has been hiked to 6% of GDP for 2008-09. The revenue deficit has also risen to 101.3% of revised estimates to Rs 2,44,513 crore, according to figures released by the comptroller general of accounts. It amounted to a substantially lower 86.6% a year earlier.

Finance minister Pranab Mukherjee, in the interim Budget, revised the revenue deficit target to 4.4% of GDP from the 1% in the Budget estimate for 2008-09, and kept the revised fiscal deficit at 6% of GDP, against the budgeted figure of 2.5%. However, Planning Commission deputy chairman Montek Singh Ahluwalia said last week that the fiscal deficit for 2008-09 could exceed the targeted 6% of GDP on account of the stimulus measures.

Theres still growth in taxes and this could mean that the fiscal and revenue deficits stay on target for 2008-09. March is always an odd month and much will depend on the tax collections in that month. Traditionally, a revenue surplus has been reported in March, said Saumitra Chaudhuri, a member of the Prime Ministers Economic Advisory Council.

As a result of the economic slowdown, the Centres revenue receipts amount to 77.8% of the revised estimate at Rs 4,37,397 crore until the end of February 2009, against 83.1% a year earlier. Tax revenues stood at Rs 3,56,390 crore, or 76.5% of revised estimates, significantly lower than the 81.6% clocked until February 2008. While the government has already lowered its tax collection target for 2008-09, revenue secretary PV Bhide recently said tax receipts for the year would only nominally exceed total collections last fiscal.

But expenditure is more or less on target. The Centres total expenditure up to February 2009 stood at Rs 7,48,324 crore, or 83.1% of the revised estimate. This is marginally higher than its total expenditure of 82.3% a year earlier. Of this, Plan expenditure amounted to Rs 2,32,577 crore, or 82.2% of the revised estimate, while non-Plan expenditure totalled Rs 5,15,747 crore, at 83.5% of the full fisc target.