With the current account deficit (CAD) increasing to 3.7% of GDP in the September quarter as compared to 3.4% in the previous quarter, the stage is all set for it to rise further, given that November exports growth has fallen to 3.9%. Indeed, the only reason why CAD did not balloon out of control?it rose to $16.9 billion from $15.8 billion in the June quarter while the trade deficit rose to $43.9 billion from $41.7 billion (services balance remained unchanged at $15.5 billion)?was because remittances from Indians in the Gulf primarily rose to $7.5 billion from $6.8 billion in the June quarter. Without the remittances, September current account deficit would have been 5.4% of GDP! Under normal circumstances, the deficit wouldn?t have mattered as much, but this time around, the deficit has risen at a time when capital inflows have slowed to a trickle. FDI is down to $4.4 billion from $7.9 billion in June and FII was minus $1.2 billion versus $2.5 billion in the June quarter (and $19.2 billion in September 2010!).
India?s current account balance has been worse in the past. It was 4.1% at the time of Lehman in September 2008 and 4.3% of GDP in September 2010, but there were always mitigating circumstances. In September 2008, it is true, many parameters looked similar?FDI was $4.9 billion ($4.4 billion in September 2011) and FII inflows were down $1.3 billion (minus $1.2 billion in September 2011), but forex reserves were 37 months of imports then as compared to a mere 7.2 months today. In September 2010, while FDI was lower, FII was a whopping $19.2 billion. In short, India?s BoP has rarely been as bad for many years. While the government has opened up markets for individual investors in an attempt to raise portfolio investment, the impact is likely to be negligible till such time overall economic prospects improve. Indeed, with CAD likely to worsen, and the expected redemption pressure on FCCBs of India Inc, the rupee is certain to further weaken. In which case, RBI will find it that much more difficult to cut interest rates. All eyes now on whether the FM unleashes reforms in the Budget?since state elections will be over by then, and the general elections will be two years away, this will be the only window of opportunity.