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India's Balance of Payment Improved Dramatically: An Analysis
Mar 13, 2014

India’s balance of payments (BOP) improved dramatically in the third quarter (October-December 2013) of the current financial year. In releasing the data a full three weeks before the scheduled date in end-March, the Reserve Bank of India has, though not for the first time, broken with convention to share the good news with the markets as soon as it could. The significant piece of news in the BOP data for the third quarter is the dramatic narrowing of the current account deficit (CAD) to $4.2 billion (0.9 per cent of GDP) from $31.9 billion (6.5 per cent) in the same period last year. Even compared with the preceding quarter (July-September) when the CAD was $5.2 billion (1.2 per cent), the performance is impressive. On a cumulative basis, during the nine months of 2013-14, the CAD at $31.1 billion (or 2.5 per cent) marks a big improvement over the corresponding period last year when it was $69.8 billion (or 5.2 per cent).

In a signal that pressure on the external sector is easing, India’s current account deficit narrowed to a four-year low in the fiscal third quarter, aided by a decline in gold imports and revival of exports. The deficit was at 0.9% of gross domestic product (GDP) in the three months ended 31 December.

The current account, an important measure of economic health, is the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers.

Narrowing of the deficit was helped by curbs placed on gold imports by the government, which raised taxes on purchases of the gold overseas, and by a revival of exports after a prolonged slowdown. It has reduced pressure on the rupee, which has recovered to around 61-62 per dollar level after falling to an all-time low of 68.85 in August 2013.

The current account deficit narrowed from 1.2% of GDP in the preceding quarter ended September. The deficit at the end of the third quarter in the previous year was equivalent to 6.5% of GDP. In the three months ended December it was at $4.2 billion, down from $31.9 billion a year ago, according to the balance of payments (BoP) data released by RBI.

In the first nine months of the fiscal year, the current account deficit was $31.1 billion, or 2.3% of GDP, against $69.8 billion, or 5.2% of GDP, in the year-ago period. Economists said imports are likely to rise in the next fiscal year as economic growth picks up. As growth improves, we will see imports rising like that of plant and machinery. However, if the positive policy interventions are effective, coal imports should reduce. They also do not expect too much of fluctuation in oil prices. With growth in US and Europe picking up, exports growth should continue.

India’s trade deficit in the October-December quarter fell to $33.2 billion in the third quarter of 2013-14 from $58.4 billion a year ago. While exports rose 7.5% to $79.8 billion riding on good growth in exports of engineering goods, ready-made garments, iron ore, marine products and chemicals, imports declined by 14.8% to $112.9 billion due to the decline in gold imports.

Imports of the precious metal fell sharply to $3.1 billion from $17.8 billion, as high customs duty lessened demand. The government had in the past one year progressively raised the import duty on gold to 10% to control the spiralling current account deficit and ease the pressure on rupee. The central bank also put curbs on banks on loans against gold coins.

The Indian rupee managed to hold its own against the dollar in January even after the US Federal Reserve started its tapering programme even as currencies of other countries like Argentina, South Africa and Turkey plunged.

This quarter, capital inflows were able to finance the deficit. While net foreign direct investment inflow was at $6.1 billion, portfolio investment was at $ 2.4 billion in the quarter. Within portfolio investment, the debt segment showed net outflows, offset by higher net inflows of $6.2 billion into equities. There was an accretion of $19.1 billion to foreign exchange reserves in the quarter, compared to a drawdown of $10.4 billion in the preceding quarter.

The full-year current account deficit should be around 2% of GDP, or at $35-37 billion. Current account deficit for 2012-13 was at a record 4.8% of GDP.

However, while due credit should be given to the government and the RBI, there is a need for continued vigilance. Lower non-bullion imports reflect the ongoing economic slowdown. The government’s clampdown on gold imports through tariffs and administrative measures might have paid off, but there is enough evidence that a part of the gold trade has moved underground with large-scale smuggling starting again.

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