Balance of payments worries

The Reserve Bank’s release of balance of payments data for 2011-12 reveals growing stresses, after two decades of comfort, with serious imbalances in trade and current balance, partly due to global uncertainty but reflecting much more a steady worsening of macro-economic fundamentals at home. Equally there is discomfiture over the exchange rate volatility with the rupee depreciating by some 25 per cent till June hitting the economy in several ways.

India has had to rely on larger external borrowings, in these times of risk-averse capital flows as eurozone grapples with its sovereign debt crisis and a recession, as well as drawing down some of its reserves to make up for funding requirements. The country’s reserves had also lost the growth buoyancy of mid-2000s and tended to decline in the latter half of fiscal 2012 from a level of US$ 316 billion in October 2011 to around US$ 288 billion by the end of June 2012.

The prime minster, who has now taken over finance portfolio, has already shared his concern over the deterioration and has put BOP management as one of the priorities. RBI had raised interest rates for NRI deposits which showed some surge (to $ 58 billion), but the more recent measures (25 June) on raising of limits for ECB and FII investments, as part of measures to stabilise the rupee, proved a damp squib.

There is now greater urgency to boost exports with diversification in products and markets taking advantage of cheaper rupee, to the extent possible to mitigate the deficit, besides whatever new measures are taken to stimulate domestic investment through policy refinements and to attract a larger flow of direct investment from abroad.

A major factor for the BOP deterioration was a record rise in trade deficit to $189.7 billion in 2011-12, reflecting rising consumption of higher priced oil and imports of precious metals, both accounting for 45 per cent of rise in imports which had grown at 31.1 per cent as against the moderation in exports growth (23.6 per cent). On the financial side, the deficit showed itself up with the sharp drop in portfolio investments combined with the investment income deficit with an outflow of $ 16.3 billion, as in previous year.

During the year, the current account deficit widened to the highest ever level both in absolute terms and as a proportion of GDP. The CAD at US$ 78.2 billion was 4.2 per cent of GDP in 2011-12 as compared with US$ 46.0 billion or 2.7 per cent of GDP during the previous year. The rise in CAD-GDP ratio also resulted from slower GDP growth and its contraction in dollar terms due to depreciation of rupee.

The fourth quarter (January-March) registered heightened stress with trade deficit exceeding $ 50 billion (10.6 per cent of GDP) and CAD rose to US$ 21.7 billion (4.5 per cent of GDP). Exports decelerated to 3.4 per cent (46.9 per cent growth in corresponding quarter of 2010-11) while imports grew by 22.6 per cent. There was a draw-down of foreign exchange reserves of US$ 5.7 billion.

For 2011-12 as a whole, the current account deficit rose to $ 78.2 billion (4.2 per cent of GDP), largely reflecting higher trade deficit on account of subdued external demand and relatively inelastic imports of POL and gold & silver.  

Though there was higher net inflow under capital and financial account (excluding changes in reserve assets) of $ 67.8 billion, as compared with $ 62.0 billion in 2010-11, the draw-down of reserves rose to $ 12.8 billion (as against an accretion of $ 13.1 billion in previous year).

The declining foreign exchange reserves reduced the cover of foreign exchange reserves to external debt to 85 per cent as compared with 99.6 per cent at end-March 2011. With a widening current account deficit and continued uncertainty in global economic scenario and prospects for equity flows, dependence on debt flows rose considerably during 2011-12.

External debt stock increased by nearly $ 40 billion to $ 345.8 billion (20 per cent of GDP) and key vulnerability indicators like debt-GDP ratio and debt service ratio witnessed deterioration over the year. The increase in debt of $ 39.9 billion or 13 per cent over the end-March 2011 level was under commercial borrowings, short-term trade credits, and rupee denominated non-resident Indian deposits.

The share of commercial borrowings stood highest at 30.2 per cent as at end-March 2012 followed by short term debt (22.6 per cent), NRI deposits (16.9 per cent) and multilateral debt (14.6 per cent). The short term debt increased by US$ 13.2 billion on account of rise in short term trade credits, FII investment in T-bills etc. The debt service ratio increased to 5.6 per cent during 2011-12 as compared to 4.2 per cent during 2010-11.

The rise in external debt (which was 20 per cent of GDP at the end of March 2012) – not a distress signal at present – results, according to RBI,  from large recourse to borrowings in particular of short-term nature given widening financing needs and growing uncertainty in global financial markets as situation in eurozone continued to be fragile.

The long-term debt ($ 267.6 billion) and short-term debt ($ 78.2 billion) accounted for 77.4 per cent and 22.6 per cent, respectively, of the total external debt in March 2012. The short term debt is inherently risky for outflows.  

Of the total external debt at $ 345 billion, the sovereign debt is only $ 81.89 billion or 4.7 per cent of GDP while non-government debt accounts for nearly three-fourths at $ 263.92 billion (15.3 per cent of GDP). As a ratio of GDP, there was a rise in the share of short-term debt to total debt (22.6 per cent) and in relation to reserves (26.6) per cent at end-March 2012.

The asset-liability ratio declined from 71.1 per cent in March 2010 to 68.4 per cent in March 2011, and further to 64.1 per cent in March.

The ratio of total international financial liabilities to GDP rose to 38.8 per cent from 37.4 per cent a year ago. These liabilities included direct investment which stood at $ 219.6 billion and portfolio investment at $ 162.9 billion at end-March 2012.  

The equity liabilities (direct and portfolio) were revised upwards by $ 17.7 billion when valued at end-March 2012 exchange rate following the rupee appreciation in the last quarter (Jan-March).
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