India's BoP

India’s position of commercial transactions with the rest of the world, known as Balance of Payments, fell to a deficit in the December quarter for the first time since the Lehman Brothers collapse, as imports far exceeded exports and capital flows slowed, stoking fears the currency may wobble again. But it may improve in the fiscal fourth quarter ending March because of a surge in overseas fund flows since January at $9 billion, and slowing gold demand, a substantial portion of the imports, due to high prices and taxes. Balance of Payments, a record of trade in goods, invisible services and capital flows into and out of the country, ended in a deficit of $12.8 billion in the December quarter. Slippery Ground: $53.7billion Current account deficit in April-December. It stood at $39.6 billion a year ago $47.5billion Net inflows under Capital & Financial account. The yearago figure was $52.9 billion $7.1billion Reserves drawdown Current Account Deficit at $19.4 b The current account deficit, the excess of imports of goods and services over exports, touched $19.4 billion, or 4% of the gross domestic product which is considered inimical to economic growth by economists, provisional figures from the Reserve Bank of India show. With reserves enough to just feed about 5 months of imports and repay one year debt, the deficit number is probably the worst the country is facing since 1991 when India pledged its gold to avoid defaults. Net capital inflows in the December quarter fell to $8 billion, from $17.2 billion in the previous quarter as corporates borrowed less from overseas markets due to European banks shutting doors. The Indian rupee moved to the best performer position in Asia this year, from the worst last year due to portfolio flows and central bank curbs on speculation. But the gain is fast eroding with renewed concerns about government finances with fiscal deficit of 5.1% forecast for next fiscal. India’s external economic position has been deteriorating with exports slowing substantially due to the European economic crisis, leading to lower US dollar earnings. But import bill is soaring, thanks to excessive demand and a surge in prices of crude oil, which India imports for more than three-fourths of its requirement and sells petroleum products at subsidised rates. Foreign portfolio flows that had been funding high imports, is also slowing as global investors fear that obstacles to economic growth could lower corporate earnings and thus, returns from stocks. An analysis of various components of balance of payments indicate that the trade deficit rose by more than 50% to $47 billion during October-December ’11 compared to $31 billion in the year-ago period. As a result, despite a rise in invisibles which includes current transfers such as remittances and services income such as software services, the currency account deficit rose sharply to touch almost 4% of GDP.

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