After precariously teetering on the precipice of a crisis in the last fiscal year, India’s balance of payments in the first quarter of the current fiscal edged to a surplus of $500 million ( 2,640 crore today).

What, of course, helped this was the shrinking of the current account deficit to $16.55 billion in the June quarter, down from an all-time high of $21.76 billion in the three months ended March. That fell mainly because of a decline in gold imports and a drop in oil prices. But oil prices at $110 a barrel will counter this trend.

Secondly, net invisibles inflows fell to $25.9 billion in the June quarter, compared with $29.8 in the March quarter as there was a slowdown in software services exports because of depressed global economic conditions.

To be sure, capital flows into India have been enough to finance this current account deficit. But again the point of concern here is that these have been mainly debt inflows.

Almost three-fourths of the $17 billion capital inflows consisted of debt as the Reserve Bank of India (RBI) and the government paved the path for easier debt inflows. NRI (non-resident Indian) deposits, for instance, improved to $6.6 billion for the first quarter of this fiscal year compared with $4.7 billion in March. Short-term trade credit jumped to $5.2 billion in June from $200 million a quarter ago.

This has a couple of implications. One is that India’s total external debt increased to 21.7% of the gross domestic product in June compared with 20% in the March quarter. Looking at it another way, foreign exchange cover for India’s external debt fell to 82.9% in June compared with 85.1% in March, though that has to do with reserves not accumulating fast enough as well.

Secondly, this increasing pile of debt will have an impact on the current account deficit as well. Investment income payments increased by 14.5% in the June quarter, RBI says. As the debt piles up, this will increase and stress the current account deficit, setting off a vicious cycle.

Of course, with the new round of monetary loosening by the US Federal Reserve and the European Central Bank, this position should change. In the July-September quarter, for example, equity portfolio inflows were to the tune of $7.5 billion, which should go some way in assuaging such fears.

The recent round of reforms, which should bring in more equity inflows, both direct and portfolio, will also reduce the risk of a sovereign downgrade, which could prompt a reversal of these capital inflows.

But one conclusion is inescapable. With this level of current account deficit and external debt position, India’s dependence on global economic growth remains; things are not good on that front. Thus, any slight improvement seen in the last quarter is likely to be ephemeral.

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