RBI warning as BoP deeper in red

New Delhi: Reflecting India’s growing vulnerability on the external sector, all the key parameters of the balance of payments (BoP) are flashing amber.

Data released by the Reserve Bank of India (RBI) on Friday shows that the current account deficit—the sum of the balance of trade and invisibles such as remittances and software earnings—in the fourth quarter of 2011-12 had spurted to the highest-ever level of 4.5% of gross domestic product (GDP), compared with 1.3% in the same period last year. The current account deficit for the full fiscal stood at 4.2% of GDP, or $78.2 billion, again a record high, crossing government and economist projections of 4%. The current account deficit in 2010-11 was at 2.7% of GDP.

Similarly, the country’s external debt scaled a new peak, provoking the central bank to sound a warning: “External debt stock increased during 2011-12, and key vulnerability indicators like debt-GDP ratio and debt-service ratio witnessed deterioration over the year.”

At the end of March, the external debt stock stood at $345.8 billion (20% of GDP), up 13% from $305.9 billion at the end of the same period last year. Consquently, the debt-service ratio increased to 5.6% in 2011-12 from 4.2% in 2010-11.

This was prompted by an increase in commercial borrowings, short-term trade credits, and rupee-denominated non-resident Indian (NRI) deposits.

In fact, if it had not been for the rupee’s sharp fall vis-à-vis the dollar, external debt would have increased by $51.8 billion in the current fiscal.

The share of commercial borrowings stood highest at 30.2% at end-March 2012, followed by short-term debt (22.6%), NRI deposits (16.9%) and multilateral debt (14.6%).

While short-term debt increased by $13.2 billion to $78.2 billion on account of the rise in short-term trade credits, foreign institutional investor (FII) investment in treasury bills, commercial bank borrowings and long-term debt increased $26.7 billion to $267.6 billion.

India’s foreign exchange reserves, which aggregated $294.397 billion at the end of March, provided a cover of 85.1% to the external debt stock, compared with 99.6% a year ago.

Analysts were even more conservative than the central bank about the outlook on the external sector.

“There is no doubt that we are more vulnerable to external shocks than ever before. Even during the Lehman crisis in 2008-09, the situation was not this bad,” said D.K. Joshi, chief economist at rating agency Crisil Ltd. “Growth is lower, current account deficit is high, and foreign debt is higher. Even a small external shock will lead exert a lot of pressure on the rupee, since now we are more vulverable.”

India’s current account deficit increased to $21.7 billion in January-March from $6.3 billion a year ago, mainly on account of a rising trade deficit. A rising import bill, consisting mainly of price-inelastic items such as petroleum products and gold, coupled with a slowdown in exports, widened the country’s trade deficit to $51.6 billion in the March quarter from $30 billion in the year-ago period.

While merchandise exports grew only 3.4% to $80 billion, growth in merchandise imports was higher at 22.6% to $131.7 billion in the quarter. Growth in service exports also moderated to 21% in the quarter from 72% in the year-ago period.

Economists estimate the current account deficit in the current year at around 3.5-3.6%, as slowing economic activity and falling crude prices are expected to limit the import bill.

“Recent commodity price movements have eased concerns regarding the size of India’s current account deficit in the current fiscal. However, rising demand for imports of commodities such as coal would exert continued pressure on the current account balance, funding of which is likely to remain challenging in the current fiscal year,” said Aditi Nayar, senior economist at Icra Ltd. “The demand for crude oil is relatively price inelastic given the incomplete pass-through of international price changes to domestic prices of certain petroleum products.”

While capital inflows improved, reflecting a significant increase in foreign portfolio investment and non-resident deposits, the flows again fell short of financing the deficit requirements, resulting in a draw down of foreign exchange reserves amounting to $5.7 billion.

Net capital inflows nearly doubled to $16.5 billion in the quarter, from $9.1 billion in the year-ago period. Net portfolio investments in the quarter increased to $13.9 billion from an outflow of $10 million in the year-ago period. Deposits from non-resident Indians also saw a sharp rise to $4.7 billion, from $0.9 billion after RBI deregulated interest rates on these deposits in December 2011.

“RBI and the government have initiated various measures to ease capital inflows including deregulation of NRI deposit rates. Measures to boost exports would aid in a structural readjustment of the trade deficit, given the relatively inelastic nature of a substantial portion of the Indian import basket,” Nayar said.

Reflecting the twin-deficit problem, separate data released by the Controller General of Accounts showed that the fiscal deficit touched 27% of the budget estimate in the first two months of the current fiscal. In absolute terms, the fiscal deficit in the April-May period of the current fiscal stood at Rs 1.41 trillion, against Rs 1.3 trillion in the year-ago period. In the current fiscal, the government has targeted the fiscal deficit at Rs 5.13 trillion, or 5.1% of GDP.

PTI contributed to this story.

remya.n@livemint.com