With a sharp rise in the import bill and an economic downturn, India’s current account deficit (CAD) shot up to $78.2 billion (4.2 per cent of gross domestic product) for the year ended March 2012, from $46 billion (2.7 per cent of GDP) the previous year. This is the highest level of CAD ever — both in absolute terms and as a proportion of GDP — according to the Reserve Bank of India.
For the quarter ended March, CAD rose to $21.7 billion (4.5 per cent of GDP), compared with $6.3 billion (1.3 per cent of GDP) for the corresponding quarter the previous year.
Madan Sabnavis, chief economist with rating agency CARE, said the deficit numbers were above the estimate of four per cent. The Prime Minister’s Economic Advisory Council had thought the deficit would be 3.6 per cent of GDP in 2011-12.
The stress witnessed in India’s balance of payments (BoP) in the third (December 2011) quarter continued during the fourth quarter of 2011-12 too, due to a large increase in imports. With export growth lagging import growth, the trade deficit for January-March 2012 widened to $51.6 billion from $30 billion in the same quarter last year.
Growth in net services exports in the fourth quarter decelerated to 21.1 per cent from 72 per cent in the fourth quarter of 2010-11.
|FALLING HEALTH OF EXTERNAL SECTOR
Current account deficit and balance of payment (in $ bn)
|Current account balance (in deficit)
| Merchandise trade balance
| Primary income*
| Secondary income#
| CAD as % GDP
| Capital Account balance
| Overall balance
|CAD: Current Account Deficit; *Compensation of employees + investment income
# Personal and other transfers (remittances)
The weak rupee gave a boost to private transfers by Indians residing abroad. Net secondary income (private transfers) rose 24 per cent to $16.9 billion in the fourth quarter, from $13.6 billion a year before. Capital inflows improved on significant increase in portfolio investment and non-resident deposits. Yet, they fell short of the financing requirement.
BoP remained in deficit for the second quarter in a row. It went into negative territory during the third quarter that ended December 2011. There was a drawdown of $12.8 billion in the third quarter.
The deterioration on the current account and inadequate capital flows led to a net drawdown of foreign exchange reserves, of $5.7 billion in the fourth quarter of 2011-12, compared to a reserve build-up of $2 billion in the same quarter 2010-11. For the year as a whole, there was a net draw-down of $12.8 billion in 2011-12, as against a net accretion of $13.1 billion in 2010-11.