The balance of payments, or BoP, data for the December quarter, although no guide to the future, were looked forward to eagerly to gauge the disastrous impact of the meltdown during the quarter.
The first notable thing is that the trade balance was lower in the three months to December than in the preceding quarter. Exports were down, but imports fell faster, thanks to the fall in oil prices. But the current account balance was higher than in the September quarter because of lower net invisibles.
There were two notable trends in invisibles—software exports were lower by a bit more than $1 billion (Rs5,100 crore) during the quarter but the real damage seems to have been done to remittances. These were down by at least 2.5 billion compared with the previous quarter. In the December quarter of 2007-08, remittances had increased by $1.6 billion compared with the preceding quarter.
Also See Meltdown Impact (Graphic)
Anecdotal evidence has already piled up of the return of Indians from the Persian Gulf and the data now confirm the drop in remittances. In fact, private transfers in the third quarter of 2008-09 were lower than in the corresponding quarter of the previous year. As a result, net invisibles surplus financed 59.75% of the trade deficit compared with 82.6% in the third quarter of 2007-08.
The most important change, however, was in the capital account, which turned negative for the first time since the first quarter of 1998-99. The positive balance in the capital account had already become insufficient to offset the negative balance in the current account during the September quarter. In the three months to September, the deficit in the capital account added to the deficit in the current account, eating further into foreign exchange reserves. No wonder the rupee fell like a stone.
It was also in the capital account that the impact of the credit crunch during the last quarter was clearly visible. Short-term trade credit to India saw a net outflow of $3.1 billion, against inflows of $4.1 billion in the third quarter of 2007-08, mainly due to lower disbursements that reflected tightness in overseas markets and increased repayments as a rollover was difficult.
The other main negative items were net portfolio and banking capital outflows. On the other hand, the capital account was bolstered by inflows on account of non-resident Indian deposits, and external commercial borrowings actually increased compared with the previous quarter.
That said, most economists say that the worst of the external deficit is behind us. Sonal Varma, economist at Nomura Securities Co. Ltd, had pointed out: “It is likely that the invisibles trade surplus, particularly overseas worker remittances, deteriorated. However, we judge that the narrowing in the merchandise trade deficit will more than offset this, causing the overall current account to swing into surplus for the first time in eight quarters.”
The production of gas from the Krishna-Godavari basin will also help reduce the current account deficit. As far as the capital account is concerned, the panic of the December quarter has abated and the March quarter should see lower outflows on account of portfolio funds, banking capital and short-term credits.
On the other side of the ledger, though, external commercial borrowings, too, should come down. But while inward foreign direct investment is likely to reduce, the silver lining is that the net figure may be higher, on account of outward foreign direct investment also coming down.
In short, the high negative figure in the December quarter’s capital account should be much reduced in the March quarter.
Graphics by Ahmed Raza Khan / Mint
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