In conformity with expectations, India’s current account in the balance of payments came under stress during the second quarter of the current fiscal year.
Both in absolute terms and as a proportion of the gross domestic product, this imbalance was pronounced – at $22.3 billion from the year ago figure of $18.9 billion, it was also sharply higher at 5.4% of GDP compared with 4.2%.
Clearly, this order of the current account deficit is well above the comfort level of 3% and mainly springs from the ever-rising import bill that has been far in excess of both exports and net invisibles earnings.
The picture is slightly different for the first half of the year, though the overall situation is none-too-edifying. The gap in the current account had swelled to $38.7 billion from $36.3 billion during the same period of the previous year; the current account deficit to GDP ratio also stood higher at 4.6% as against 4%.
Taking a holistic view, after evaluating the performance of the invisibles components of the balance of payments as well as capital flows, there was an erosion in reserves by a modest amount of $0.2 billion during the July-September 2012 period.
For the first half of the on-going fiscal too, the net position in the current account stood at -$39.3 billion, up from the preceding year’s -$36.4 billion.
On the other hand, capital flows had declined to $39.3 billion from $42.1 billion.
In the capital account, among the major components, there was a setback in foreign
direct investment — to $12.8 billion from $15.8 billion, while a surge was evident in respect of portfolio investment – to $5.8 billion from $1.3 billion.
With these divergent trends to the fore during the six months ended September 2012, the forex kitty was augmented by only $0.3 billion in contrast to an increase of $5.7 billion in the same half of the previous year.
However, the valuation effect — that is, the change in the value of the dollar in relation to other major currencies was also minuscule in the current year vis –a-vis the year ago, at $0.1 billion as against $0.9 billion. In other words, the drawdown in reserves worked out to a mere $0.4 billion ($6.6 billion).
From the RBI data, it emerges that the deterioration in the external payments ledger stems from the tardy foreign trade performance in merchandise.
In the second quarter, both exports and imports had declined, but this has not prevented the trade deficit from ballooning to as high as $48.3 billion from $44.5 billion.
During the first half, though this gap was virtually static, it had remained rather high at $90.7 bilion.