India’s current account deficit is expected to remain, but the quantum of deficit may fall on account of sharp growth in software exports, more merchandise exports and a fall in growth of imports, according to the Economic Survey 2006-07.
The current account deficit touched $11.16 billion in the end of September 2006, which reflects growing merchandise imports, resulting in industrial growth at a fast pace.
The current account deficit, which was 1.1% of the GDP in 2005-06, is the excess of imports of goods and services over their exports. The deficit needs to be financed by overseas borrowings and foreign investment in India.
Rajiv Kumar, director and chief executive of Indian Council For Research on International Economic Relations, an autonomous research institute, said the absolute amount of current account deficit is likely to grow, but the extent of likely growth is not worrisome. “Current account deficit is not likely to rise beyond 1.5% of GDP over the next two years,” he said.
The problem more likely would be monetary management of India’s large foreign exchange reserves, concluded the Survey. The foreign exchange reserves touched $180 billion this month, enough to cover 11 months of imports.
India ran a current deficit for 24 consecutive years between 1977-78 and 2000-01. After that, came a period of three years of surplus. Beginning 2004-05, India’s external balance sheet again ran deficits as imports gathered momentum in line with a pick-up in economic activity.
The impact of the growing imports in merchandise on the current account deficit has been partially neutralized by the buoyancy in invisibles: Invisibles refer to foreign exchange flows coming out of trade in services, remittances by diaspora and income from Indian investments abroad.
The big change over the last decade in the pattern of invisibles flow is the rise of trade in services such as software. Remittances from Indian diaspora continued to be the other critical component of invisibles. The net remittance in 2005-06 was $24.1 billion, higher 20% on year. (India has the largest remittance inflow in the world, followed by China and Mexico.)
Foreign capital inflows helped finance the current account deficits over the last couple of years and also added to foreign exchange reserves. The aggregate foreign investment in 2005-06 was $18.2 billion, higher by 49% as compared to the previous year.
Imports grew at 25.4% on year in dollar terms during April-September 2006 to reach $95.7 billion, primarily on account of the growth in value of crude oil imports. Petroleum, oil and lubricants account for about 33.7% of India’s import basket in April-October 2006, against 29.6% a year ago.
Exports grew 22.9% on year in April-September 2006 to reach $60.6 billion. In addition to absolute growth in exports, the pattern of exports indicated that India has moved up the value chain in some key goods, said the Survey. With imports of goods growing faster than their exports in the last few years, trade deficit touched a record high of $46 billion in 2005-06.
Separately, India is likely to see an investment of Rs3,00,000 crore and creation of four million jobs if all the 237 special economic zone proposals—that have received formal approvals—become operational, said the Survey.
The Survey, however, did not make a clear statement on usefulness of such SEZs in the wake of widespread protests from farmers. It limited itself to listing the government’s broad aims in setting up SEZs and the guidelines for land acquisition.