Trade deficit lowers first quarter CAD

Contraction due to lower trade deficit; balance of payments stays positive

Helped by a shrinking trade deficit, India’s current account deficit (CAD) declined significantly to $0.3 billion (0.1 per cent of gross domestic product or GDP) in the quarter ended June 2016.

The CAD for the first quarter of 2015-16 was $6.1 billion (1.2 per cent of GDP).

The contraction in the CAD was primarily due to lower trade deficit — merchandise exports minus imports, the Reserve Bank of India (RBI) said in a statement on Wednesday.

Many economist had expected a surplus on current account in Q1 of FY17 but the weak performance on services trade came as a drag. The country had reported surplus on current account of $2.6 billion in January-March 2007.

Aditi Nayar, senior economist, ICRA, said a sharp fall in gold imports and continuing benefit from a lower oil import bill limited the CAD at a marginal $0.3 billion in Q1 of FY17. That helped to offset the drag exerted by the narrower surplus of services trade and lower remittances. On services trade, the net services receipts declined on a year-on-year basis, largely due to a fall in net earnings on account of travel, financial services and other business services. Net payment on account of primary income (dividend, interest and profit) increased marginally in Q1 of 2016-17 from a year ago.

Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to $15.2 billion, declining from the preceding quarter as well as from a year ago, RBI said.

ICRA said the extent of revival in gold imports during the remainder of this financial year, particularly during the festive season, would critically impact the size of the current account deficit. The rating agency expected the current account deficit at $20-25 billion in FY17 against $22 billion in FY16.

RBI said the net foreign direct investment (FDI) moderated to $4.1 billion in Q1 of 2016-17 from $10 billion in Q1 of 2015-16 and $8.8 billion in the preceding quarter (Q4 of 2015-16). Madan Sabnavis, chief economist, CARE Ratings, said FDI receipts have almost halved — which is a concern as it does indicate that the response to opening up could be slowing down.

Portfolio investments, recorded a net inflow of $2.1 billion in Q1 of 2016-17 against a marginal outflow in Q1 of FY16. The outflow was of $1.5 billion in the preceding quarter.

Balance of Payments (BoP) remained in the positive territory with addition to foreign exchange reserves in Q1 of FY17, albeit in lesser value compared to first quarter of FY16.

Foreign exchange reserves (on a BoP basis) rose by $7 billion in Q1 of 2016-17 against an accretion of $11.4 billion in Q1 of 2015-16. The addition to forex reserves was $3.3 billion in Q4 of 2015-16, according to RBI data.