Current account deficit narrows to 1.1% of GDP in fourth quarter

Current account deficit narrows to 1.1% of GDP in fourth quarter

New Delhi: India’s current account deficit narrowed to 1.1% of gross domestic product (GDP) in the fourth quarter of 2010-11 from 3.05% of GDP during the same period a year ago, aided by the robust performance of both merchandise and service exports.

Data released by the Reserve Bank of India on Thursday showed that in absolute terms, the deficit shrunk to $5.4 billion in the January-March quarter from $12.8 billion in the year-ago period.

For the full fiscal, despite an improvement in net invisibles, current account deficit widened to $44.3 billion in absolute terms from $38.4 billion in 2009-10, mainly on account of the higher trade deficit. As a proportion of GDP, current account deficit was, however, marginally lower at 2.6% from 2.8% in the previous fiscal.

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In the quarter ended March, while merchandise exports picked up significantly, there was moderation in the growth of merchandise imports, bringing down the trade deficit to $29.9 billion from $31.6 billion in the same period a year ago.

Crisil Ltd chief economist D.K. Joshi said the news was a positive development.

“We expect current account deficit to be in the tolerable level of 2.5-3% of GDP during the current fiscal," he said. Export growth will moderate in the current fiscal, a year of consolidation, as against last year, which saw a rebound from the economic downturn, Joshi said.

Exports have seen a strong bounce back in the last six months of the fiscal, helping bridge the trade-deficit gap, said Shubhada Rao, chief economist at Yes Bank. “Software expenditures have also improved across the globe reflecting improvement in business sentiment."

However, she cautioned that uncertainty around commodity prices, especially oil prices, is a worrying factor. “But we do not see any risk of capital flows being unable to meet the current account deficit."

Net invisibles, the difference between receipts and payments on account of services, reversed their decline and grew 30.4% to $24.5 billion in the quarter ended March. This was on account of the export of services such as travel, transportation, software, business and financial services picking up. Net invisibles declined 5.4% to $18.8 billion in the year earlier.

Though there was moderation in the capital account surplus because of lower foreign direct investment (FDI) and portfolio flows, it exceeded the current account deficit, leading to an accretion of $2 billion to India’s foreign exchange reserves in the quarter.

Net capital flows were significantly lower at $8.2 billion in the fourth quarter of 2010-11, compared with $15.8 billion in the year-ago period as higher inflows on account of external commercial borrowings and non-resident Indian deposits was offset by lower foreign direct and foreign institutional inflows.

Rao said she does not expect a significant rise in foreign inflows but a lot will depend on policy enactments. She said that the policy announcement related to infrastructure debt funds and a $10 billion limit on foreign individual investor participation in mutual fund schemes could see higher foreign inflows.

During the March quarter, net FDI fell to $600 million from $3.4 billion in the year ago. Portfolio investment declined to $200 million in the January-March quarter from $8.8 billion a year ago as foreign institutional investors (FIIs) withdrew money from Indian capital markets.

For the 2010-11 fiscal year, the trade deficit widened to $130.5 billion from $118.4 billion in 2009-10 while the net invisible surplus increased to $86.2 billion from $80 billion. Net capital inflows increased to $59.7 billion in the year as against $53.4 billion in the year-ago period.

Separate data released by RBI showed India’s external debt rose 17.2% to $305.9 billion, which was 17.3% of GDP in 2010-11, on account of the increase in commercial borrowings, short-term credit and bilateral and multilateral borrowings. Long-term debt accounted for almost 79% of the total external debt with short-term debt accounting for the rest.

Graphic by Sandeep Bhatnagar/Mint