Comments
Share this article
Print
Email
BoP surplus likely to diminish in the last two quarters of this fiscal
MUMBAI: The just-released data on India’s balance of payments for the second quarter of 2007-08 reveals a lower order of current account deficit for this period-$5.5 billion as compared to $6.3 billion during the same months of the previous fiscal-while surging capital inflows of the order of $34.8 billion ($8.5 billion, 12 months ago) have ensured that a healthy level of overall surplus at $29.2 billion as against a mere $2.3 billion a year ago.
The picture of the first six months is also essentially the same-the containment of the current account deficit at more or less the preceding year’s magnitude of $10.3 billion, a jump of about $9 billion in net invisible earnings to $31.7 billion and an overall surplus as high as $40.4 billion as against $8.6 billion during the comparable half of 2006-07, helped principally by foreign investment inflows and external commercial borrowings. The contribution of suppliers’ credit and banking capital was also sizable at around $2 billion each.
Interestingly, but not unexpectedly, this period witnessed a net outflow of NRI deposits to the tune of $78 million in contrast to the year ago when there was a net accretion of more than $2.2 billion, prompted mainly by the softening of interest rates at home.
Among the constituents of the “invisibles” in the balance of payments, there was a pronounced loss of buoyancy in software exports during the April-September 2007 period; at $16.32 billion, the incremental growth was only slightly more than $2 billion; but, this was more than offset by private transfers, mainly workers’ remittances, which soared to $19 billion from the preceding year’s $12.7 billion.
According to the Reserve Bank of India, imports continued to grow faster than exports, leading to a deterioration in the merchandise trade balance; this deficit swelled to $42.4 billion during the six months ending September 2007 from $33.8 billion in the same half of the last fiscal but a handsome spurt in net invisible receipts helped to limit the current account imbalance to only $10.7 billion which is only fractionally higher than the year-ago level of $10.3 billion.
But, India continued to attract capital flows in a massive way thus far this fiscal. From the details on the source of accretion to the foreign exchange, released by the RBI as a separate document, it is clear that there was an improvement in the net inflow from foreign direct investment, external commercial borrowings, suppliers’ credit and banking capital which with other assorted sources of inflows, led to a robust capital inflow of $51.1 billion while last year, the receipts under this head was much lower at $18.9 billion.
Adjusted for the current account deficit, the overall surplus rose to $40.4 billion thus far in the current year while this figure stood at a mere $8.6 million as of end-September 2006. This is the true extent of foreign exchange accrual from all sources; with valuation changes yielding another $8.2 billion during the first six months of 2007-08, the total foreign exchange in the kitty was augmented by as much as $48.6 billion.
Among the other interesting facts revealed by the RBI’s latest document on the BoP, some deserve a special mention. First, though in net terms, there is a reduction in the foreign direct investment in the first half of the current year as compared to last year — $3.88 billion as against $4.49 billion — the reality is otherwise. In gross terms, FDI, thus far in this fiscal, rose to $9.9 billion from $7.3 billion; but at the same time, Indian corporates were busy extending their global reach.
Their investments were worth $6 billion as compared to the previous year’s $2.8 billion.In other words, FDI flows continue to remain strong while Indian companies were also making forays into the international arena looking for investment opportunities.
Foreign portfolio investments also continued to pour into India this year on a bigger scale; at more than $18 billion by end-September 2007, they were considerably higher than the earlier year’s $1.6 billion. Likewise, external commercial borrowings nearly doubled to $10.56 billion.
The moot question is what is in store for the third and final quarters of 2007-08. While there is no doubt that sustained capital flows have propped the external sector, some slowing down in momentum is indicated by the recent developments. More rigid norms are now in place in regard to external commercial borrowings, so that corporates may not have the same leeway they had enjoyed in tapping overseas funds in the past. Likewise, restrictions on participatory notes may impact on foreign portfolio investments. The full extent of these moves may be felt in the second half of the current fiscal.
At the same time, the surging oil prices which had assumed serious dimensions only recently may plunge the merchandise trade deeper in the red; this deficit is unlikely to be offset by invisible earnings to the same extent as in the preceding quarters. All things considered, a larger current account deficit is in the cards while capital flows may come about at a reduced pace. A diminution in the overall surplus in the BoP looks highly probable in the two quarters that lie ahead.