Deficit comfort for India as FDI plays saviour; rise in oil prices bodes ill for future

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New Delhi | Published: December 15, 2016 6:14:16 AM

FDI spurt helps drive up the BoP surplus

CAD is being contained more because imports are depressed rather than any revival in exports. (PTI)CAD is being contained more because imports are depressed rather than any revival in exports. (PTI)

The country’s current account remained in deficit; at $340 million in Q2FY17, or 0.6% of GDP, it is slightly higher than the $300 million in Q1FY17. However, the CAD is being contained more because imports are depressed rather than any revival in exports—and the rise in crude oil prices doesn’t augur well. Moreover, non-gold, non-oil imports have shown only a very small uptick in Q2FY17, signalling continued reluctance by companies to invest in new capacity. However, it is the lack of any buoyancy in exports—after 24 months of contraction in merchandise exports—that should be troubling policymakers. Since markets globally don’t have much purchasing power, the government needs to help Indian exporters to compete more effectively because a weaker rupee by itself will not do the trick.

There are other concerns, too, such as the drop in private remittances; these continued to fall for the fourth straight quarter, albeit marginally. The even bigger worry would have to be the earnings from software services that stayed flat at $18 billion in Q2FY17. Apart from the loss in business due to Brexit, there are the added apprehensions now of curbs being imposed on H1B visas in the US; while FY17 may see earnings from software services at the same level as in FY16, of a little over $70 billion, these could taper off next year. In fact, invisibles, as a whole, could drop for the second consecutive year in FY17 since workers’ remittances are expected to be smaller by about $5 billion, given approximately 52% of the amount flows in from countries in West Asia. While these economies have been badly impacted by falling crude oil prices, the recent uptick in oil prices might help somewhat.

The bright spot, this time around, has been the sharp increase in FDI flows—to $17.2 billion from just $4.1 billion in Q1FY17 and $8.8 billion in Q4FY16—making it the best quarter for FDIs; a big chunk came from Vodafone Plc. This, combined with strong portfolio flows, boosted the capital account to $12.7 billion, although banking capital continued to be a drag as did the lack of external commercial borrowings. Indeed, it is the sum of the CAD and the FDI that has helped India cope with the portfolio outflows—$6 billion in less than a month—and the redemption of the FCNR(B) deposits of around $17-18 billion with the rupee depreciating too much. On balance, India appears to be reasonably well-prepared for a rate hike by the US Fed with the overall balance of payments surplus for FY17 now estimated to come in at $29 billion.

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