Hot money flows fund India’s current account deficit

The balance of payments numbers for the Dec quarter highlight India’s vulnerability on the external front
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First Published: Thu, Mar 28 2013. 07 25 PM IST
The country’s trade deficit climbed to a record $59.6 billion in the quarter as exports didn’t pick up while imports kept gaining. Photo: Priyanka Parashar/Mint
The country’s trade deficit climbed to a record $59.6 billion in the quarter as exports didn’t pick up while imports kept gaining. Photo: Priyanka Parashar/Mint
Updated: Thu, Mar 28 2013. 10 32 PM IST
The balance of payments numbers for the December quarter highlight India’s vulnerability on the external front.
There are a couple of reasons why India’s current account deficit in the three months ended December was a worse-than-forecast 6.7% of the gross domestic product. The country’s trade deficit climbed to a record $59.6 billion in the quarter as exports didn’t pick up while imports kept gaining. But it wasn’t just trade in goods that was affected. Invisible flows, or money from exports of services, funds transfer and investment income, too, declined from a year ago. The fall in invisibles was led by stagnation in income from software exports and lower private remittances.
The good news is that the trade deficit has trended down in the past couple of months and, with a slip in crude oil prices, the current account deficit for the March quarter can only get narrower.
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The bad news lies in the financing of this record current account shortfall. Although the balance of payments actually registered a surplus of $781 million in the December quarter, a huge portion of the inflows is hot money.
Foreign direct investment has fallen by half compared with a year ago. On the other hand, equity inflows have gone up by nearly five times. That is money which could be pulled out any time, if risk appetite declines. With $10 billion equity inflows in the March quarter as well, the dependence on hot money will only get worse. That’s not all. External loans jumped by about seven times in the December quarter.
As separate data released by the government show, India’s total external debt stood at $376.3 billion at the end of December compared with $345 billion six months earlier. Higher debt means higher interest payments, which deepen the current account deficit.
The conclusion is clear. The huge deficit in the current account is being funded by hot money, and even a whiff of economic turmoil globally could make India’s external financing dicey. The risks in such a policy are obvious.
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First Published: Thu, Mar 28 2013. 07 25 PM IST
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