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High remittances cushion trade gap

BS Reporter  |  Mumbai 

Q2 current a/c deficit flat, but above comfort zone.

Despite a worsening global economy, India’s current account deficit (CAD) stayed flat at $16.9 billion in the second quarter ended September over the same period last year, as a widening trade gap was offset by remittances and software exports.

To benefit from a falling value of the rupee against the dollar, Indians living abroad poured in more money. Remittances surged 25 per cent to $16.2 billion as compared to a decline of 5.6 per cent during the comparable period last year. Services exports expanded 9.3 per cent, led mainly by software, travel and transportation. That prevented further deterioration in the deficit.

Despite a higher growth in exports relative to imports, the trade deficit widened to $43.9 billion over $37 billion in the corresponding quarter last year. Signs of India’s growing vulnerability to external shocks are clear. The CAD for the first quarter ended June was $15.8 billion, while for April-September it widened to $32.7 billion from $29.5 billion a year ago, according to Reserve Bank of India (RBI) data.

According to RBI estimates, as a proportion of Gross Domestic Product (GDP), the CAD was 3.6 per cent for the half year ended September, a shade lower than 3.7 per cent in the first half of the preceding year. “The CAD at 3.6 per cent, though manageable, is beyond the comfort level. With the global slowdown, the merchandise trade balance may widen further. Robust remittances and benefits from software exports, both due to rupee depreciation, may provide relief this fiscal year,” said Madan Sabanavis, chief economist with CARE. The RBI’s comfort zone for the CAD is seen around three per cent of GDP. On a balance of payments basis, merchandise exports recorded a growth of 47.2 per cent (year-on-year) during the second quarter of 2011-12 as against an increase of 20.1 per cent during the corresponding quarter of 2010-11.

The RBI in its report on financial stability had said India’s vulnerability to external shocks had grown recently. The CAD, which rose in the first quarter, is expected to widen further. A larger CAD would necessitate higher capital inflows. The RBI, which has moved to a new reporting format for balance of payments data from the April-June quarter, has divided the erstwhile capital account into a capital account and a financial account. The capital account now comprises official transfers while the financial account includes, among others, foreign direct investment and portfolio investment as well as overseas borrowing by Indian companies.

First Published: Sat, December 31 2011. 00:17 IST