Current account deficit at 3.1% of GDP in Q1

May continue to stay around 3% this financial year.

With global headwinds turning stronger, India’s current account deficit hit 3.1 per cent of gross domestic product (GDP) at June-end, conclusion of the first quarter.

It may stay around three per cent for the current financial year. The Prime Ministers’ Economic Advisory Council had pegged the CAD at 2.7 per cent for 2011-12. It was 2.6 per cent in 2010-11. Economists claimed the rise in deficit is manageable, on the base of an expanding economic size.

In the first quarter, the CAD rose to $14.5 billion from $12 bn in the same quarter of 2010-11, due to increase in the trade deficit and continued net outflow on investment income. It was much higher than the $5.4 bn reported for the preceding quarter (January-March 2011).

The Reserve Bank of India said the trade deficit rose in the June quarter despite a sharper increase in exports than imports. There was increase in net export of services. The trade deficit amounted to $35.4 bn, higher than the $32.3 bn clocked in the first quarter of 2010-11.

The primary income account (investment income) continued to show net outflow. The receipts on account of investment income recorded a decline of 28.4 per cent, as compared to a decline of 3.5 per cent in the first quarter of 2010-11, mainly due to persistence of lower interest rates abroad.

Madan Sabnavis, chief economist with CARE Ratings, said the growth in export of goods showed moderation in July and August. This trend could have a negative impact on the year’s CAD. Services’ exports have also shown signs of slowdown. The exports from computer services were actually down in the first quarter over the same period last year. They dipped to $14.1 bn from $16.8 bn in the first quarter last year. It reflects the sharp dip in economic growth in developed countries, he said.

Net secondary income (private transfers), reflecting mainly the remittances from Indians abroad, rose 4.6 per cent to $13.7 bn. It had clocked growth of 1.3 per cent in the first quarter of 2010-11.

Brinda Jagirdar, head of economic research with State Bank of India, said though services (software) exports were slowing, remittances and moderation in global commodity prices may keep the country’s CAD under manageable limits. It could be 3-3.2 per cent for the year.

The growth in services receipts and payments remained moderate during the June quarter, lower than the preceding one. Services exports rose 15.7 per cent (18.3 per cent in the first quarter of 2010-11), mainly led by transportation, software and business services.

The net outflow on account of primary income was higher than that recorded during the first quarter of 2010-11, mainly due to larger net outflow of investment income. Investment income payments recorded an increase of 17.3 per cent (8.6 per cent in the first quarter of 2010-11), driven by higher interest payments.

Receipts on account of investment income recorded a decline of 28.4 per cent, as compared to a decline of 3.5 per cent in the corresponding quarter, mainly due to persistence of lower interest rates abroad, RBI said.