Defence, import payments inflate Q3 current a/c deficit

Difference between RBI & govt data on trade deficit is $9 bn.

Large defence procurement-related payments, as well as advances for import orders in the backdrop of a depreciating rupee, seem to have inflated India’s current account deficit to record levels in the quarter ended December 2008.

Significantly, it is the same period in which terrorists attacked several establishments in Mumbai, including the landmark Taj hotel and the busy Chhatrapati Shivaji Terminus.

According to the balance of payments (BoP) data released by the Reserve Bank of India (RBI) for the quarter ended December 2008, the current account deficit stood at a near two decades high of $14.6 billion, against $4.6 billion in the corresponding period of the previous year, posting an annual rise of 217 per cent.
 

WIDE GAP Difference between trade deficits data of the Reserve Bank of India and Ministry of Commerce
Quarter	Difference ($ bn)

Q3 '07-'08 (Oct-Dec)6.16 Q4 '07-'08 (Jan-Mar)3.91 Q1 '08-'09 (Apr-June)1.42 Q2 '08-'09 (July-Sep)0.79 Q3 '08-'09 (Oct-Dec)9

Comparison of the trade deficit data — difference between exports and imports — released by the Ministry of Commerce and the RBI in the period under consideration show an unusually high difference of $9 billion, one of the highest-ever margins seen after April 1990. This difference is 46.10 per cent more than what was seen in the same period of the 2007-08. Moreover, it is over 1,000 per cent than the levels seen in the quarter before.

“Most of this difference is likely to be because of defence import-related payments by the country during the quarter,” said a Mumbai-based economist with a leading private bank. Commerce ministry officials also agreed with this explanation.

Difference between the RBI and commerce ministry data on trade deficit have been historically seen in all quarters. This is because import figures listed by the RBI is more than what is released by the commerce ministry. The central bank imports figures capture advance payments made for import orders, which includes defence. But the exports and imports data of the commerce ministry — captured through various ports — mostly reflect value of merchandise goods which have entered or left the shores of the country.

The RBI uses its trade deficit estimate to calculate the BoP statement, that captures India’s economic transaction with the rest of the globe. Balance of payment data are critical to understand the movement of the rupee against foreign currencies.

Economists also explain that the share increase in the difference could be explained by the rapidly deflating rupee against the dollar, which increases the cost of buying overseas goods.

“In the third quarter, the transaction cycle was effected quite significantly. Importers may have paid in advance for imports in the backdrop of the depreciation in the rupee,” said Abheek Baura, chief economist, HDFC Bank.

Experts point out that Indian defence payments could be for various heads. “It could be a sum total of some initial payments made after finalising defence deals, as well as for spare parts of defence platforms like fighter aircraft and weapon systems,” said New Delhi-based strategic analyst C Uday Bhaskar. “Moreover, this is the same time when the Mumbai terror attacks happened. Hence, items of inventory for security and intelligence agencies could have been cleared by government,” he added.

The Prime Minister’s Economic Advisory Council in 2006 had pointed towards the difference between current account deficit prepared using the RBI and the commerce ministry data. In a report submitted to the prime minister in February 2006, the council had said: “The divergence, particularly in import figures, may be due to one-off payments for defence and civilian aircraft imports. It may be useful to be as transparent as possible in the published data in the public domain, so as to manage expectations on the BoP outlook, which is important to inspire the trust and confidence of potential investors, both domestic and foreign.”