Capital flows to stay buoyant

ECONOMIC SURVEY 2004-05/ BoP

Current account in deficit for the first time since 2000-01.

The Economic Survey 2004-05 today presented a strong and resilient outlook for the country's balance of payments. It said overall capital inflows were expected to remain buoyant given the positive outlook on the economy.

This is despite the balance of payments estimates for April-September 2004-05 indicating a current account deficit in the first half of the year.

The surplus in current account in the first quarter of this fiscal year was more than neutralised by the deficit in the second quarter, resulting in a deficit of $3.3 billion in the first half.

Significantly, the current account has shown deficit in the first half of the year for the first time since 2000-01, and the second quarter of 2004-05 has produced a deficit after four successive surplus quarters.

The Economic Survey attributed the deficit to large merchandise trade deficits and to the 39 per cent growth in import, which was fuelled by the high global crude price and a sustained demand for non-oil imports from the buoyant domestic industry.

The capital accounts, however, recorded a healthy surplus, but was about $1.7 billion in April-September 2005 -- lower than the levels in April-September 2003.

Like in 2003-04, buoyant foreign investment inflows have sustained the capital account along with robust commercial borrowings.

The deficit in the current account had moderated the accumulation of reserves to around $7 billion in the first half of 2004-05, which is roughly half of the reserve accretion achieved in April-September 2003-04.

However, for the year 2003-04, the survey pointed out that with a current account surplus for the third successive year, coupled with the expanding capital account lead towards strengthening the country's balance of payments scenario, almost a third of the $31.4 billion reserves came from the current account surplus.

In 2003-04, buoyant invisible inflows, particularly private transfers comprising remittance, along with software services exports, have been instrumental in creating and sustaining the current account surpluses.

MERCHANDISE TRADE
The government today said further intensifying domestic reforms, reduction in tariffs and addressing constraints such as infrastructure bottlenecks, outdated and inflexible labour laws, small-scale reservation and high transaction costs were needed to reach the ambitious export target of $ 150 billion by 2008-09.

The Economic Survey pointed out that despite a continuous rise of over 20 per cent in exports in each of the previous two years, India's ranking among the top exporting countries slipped to 31 in 2003 from 30 in the previous year.

Exporters need to place more emphasis on non-price factors like product quality, brand image, packaging, delivery and after sales service, it said adding that a more aggressive push to foreign direct investment (FDI) in export industries would not only increase the rate of investment but also infuse new technologies and management practices in these industries. Introduction of value added tax and refund of all state and local levies to exporters would help exports, it said.

The survey also emphasised the need to make available export credit at competitive rates.

Contingency trade policy and non-tariff barriers have become significant impediments to Indian exports over time with 105 anti-dumping cases and 40 cross subsidy cases initiated against India so far.