Current a/c deficit static in Q2

India’s balance of payments during the second quarter of the current financial year sprang a surprise of sorts with the current account deficit contained to what it was during the same quarter of 2010-11 — $16.9 billion.

This was despite a ballooning of the trade gap to $43.9 billion from $37 billion as both services and secondary income stayed buoyant with considerable accretion in net terms.

These facts emerge from a scrutiny of the external sector data released by the Reserve Bank of India under the revised format as per the IMF’s Balance of Payments (BoP) Manual 6, where details are furnished in four distinct categories in the current account while the traditional capital account is broken into two heads – capital account that comprise mainly official transfers and financial account.

Based on this new presentation, though exports growth was impressive at 47.2%   during this quarter, the pace of imports, at 35.4%, was higher than the 21.9%   recorded during the same period of the previous year, leading to a deterioration in the merchandise trade. Net income from services rose by 9.3% and secondary income, comprising mainly transfers, was up by over $16 billion.

In the financial account, the tempo had slackened during the July-September 2011 period to $17.9 billion from the year-ago level of $18.3 billion.  This was  a sequel to an outflow under portfolio investment ($1.4 billion) as against an inflow of $18.7 billion in the same period of the preceding year.

What was notable during this quarter is the negligible accretion to the foreign exchange reserves – a mere $0.3 billion as compared to $3.2 billion a year ago.

If we take recourse to the erstwhile presentation of the BoP data for the second quarter of 2011-12, gross capital flows were of the order of $18.4 billion compared with the previous year’s $21.6 billion. After taking into account the current account deficit and errors and omissions, the forex accrual was a minuscule amount of $0.3 billion.  The pressure on the external value of the rupee in this context is easily understandable.

For the half year ended September 2011, the external payments ledger presented a bleak picture with a widening of the current account deficit to $32.7 billion from $29.5 billion, due to a bigger trade deficit and a moderation in exports of services.    

In terms of the key indicator –the ratio of current account deficit to gross domestic product – the story was somewhat different – and optimistic  - in that this ratio stood lower at 3.6% than last year’s 3.7%  . Net capital flows were also larger at $41.1 billion.

Overall, during the first half of the current fiscal year, the accretion to foreign exchange reserves was smaller  at $5.7 billion; a year ago, at this point, the forex assets had swelled by $7 billion. However, the valuation gains were minimal in the current year, being a negligible $0.9 billion as against $6.8 billion.

In the event, the total increase in foreign exchange till September 2011, at $6.7 billion, was just about half of the incremental growth  a year ago -  $13.8 billion.

The press release on the balance of payments is very exhaustive and is therefore a mine of information.

Since the new format may pose problems in interpreting the various groupings under which the data are categorised, the RBI has taken care to give the particulars as per the conventional format, again with voluminous details. Juxtaposing the two renders the task of interpreting the statistics much easier and therefore user-friendly.