Current account deficit grows to $13.7 billion

India’s current account deficit rose sharply in the quarter ended June 30 to $13.7 billion, from $4.5 billion a year ago, due to lower invisible surplus and growth in imports outpacing exports.

Reflecting an economic recovery, the gap between exports and imports during the quarter widened to $34.2 billion, compared to $25.6 billion in April-June 2009.

Higher trade deficit, combined with lower invisible surplus, resulted in the widening of current account deficit during the first quarter of 2010-11.

Invisible receipts grew 13.6 per cent, against a fall of 4.6 per cent in the year-ago period, the Reserve Bank of India (RBI) said.

Services receipts recorded a rise of 22.5 per cent on a year-on-year basis, led by travel, transportation, software, business and financial services. Private transfer receipts continued to be robust during the first quarter of 2010-11.

Net invisibles, however, dipped due to relatively high invisibles payments in areas like travel, transportation, business and financial services. Net invisibles fell to $20.5 billion from $21.2 billion in April-June 2009.

Madan Sabnavis, chief economist with rating agency CARE, said, “Though the current account deficit is rising, we have to see the broader picture. The economic recovery is robust. This is driving increase in imports as well invisible payments.”

The current account deficit is getting funded by capital flows, including portfolio investment. With bright growth prospects in India compared to the global scenario, foreign institutional investors (FIIs) will continue to bring capital in India. The deficit on the current account at 3.5 per cent of gross domestic product for this financial year will not be a concern, he said.

The capital account surplus rose to $17.5 billion over $4.6 billion in the corresponding quarter of last year. It was mainly driven by short-term credit, external commercial borrowings (ECBs), external assistance and banking capital.

Net foreign investment, however, was much lower than the corresponding quarter of last year, mainly due to significant moderation in net inflows under FIIs investments. Net inflows under foreign direct investment were also lower during the June quarter of this financial year.

With capital account surplus higher than the current account deficit, the overall balance was in surplus at $3.7 billion, which resulted in a net accretion to foreign exchange reserves of equivalent amount during the reported quarter.

Separate data released by RBI also showed that external debt went up by 18.90 per cent to $273.08 billion at the end of June this year, compared to $229.67 billion a year ago. This was mainly due to a 27 per cent rise in ECBs, a 17 per cent increase in non-resident deposits, and a 16 per cent rise in multilateral debt.