Red-hot oil burns a hole in current account

For First Time After 2000, Current Account In BoP Ends In A Deficit During Q4

RUNAWAYoil
prices have cast a shadow on India's macro numbers. For the first time
in eight years, India recorded a deficit in its current account in the
country's balance of payments during the fourth quarter of a fiscal. A
sliding stock market and a major slowdown in debt offerings only add to
the sense of gloom.
On Monday, the Sensex fell to its lowest
close in 14 months at 13461.60, down 340.62 points or 2.47% from its
previous close. Bond yields rose as market sentiment was hit by
concerns about tightening liquidity. Yield on the 10-year benchmark
bond ended the day at 8.69%, rising from Friday's close of 8.58%.
The
current account during the fourth quarter of 2007-08 ended in a deficit
despite a 36% rise in income from services and remittances from Indians
abroad. This is mainly attributed to the surge in oil prices.
The
current account in the balance of payments measures the net position of
a country's exports and imports of goods and services. A deficit
implies that imports far outpace exports.
An economy's current
account deficit is also a measure of how much external savings it
succeeds in absorbing, to enhance investment over the level permitted
by domestic savings. India's current account deficit has consistently
been below Plan targets. Even with an abnormal spurt in imports in the last
quarter, thanks to soaring crude prices, the current account deficit
amounted to $17.4 billion or 1.5% of GDP, according to a release by the
Reserve Bank of India. At this level, the deficit is modest and
entirely sustainable and desirable. The trouble, according to
economists, would be if the deficit balloons out of hand in the coming
months, thanks to ever rising crude prices.
According to the
latest provisional data released by the Reserve Bank of India, the
current account deficit stood at $1041 million during the quarter ended
March 2008 compared with a surplus of $2,563 million a year ago. 'Current a/c deficit still within acceptable levels'
THIS
is despite the fact that services income and remittances among others
being high ($22.75 billion) to absorb the trade deficit of $23.79
billion during the quarter. India runs a deficit on the current account
overall but over the last eight years, the last quarter of a fiscal has
seen a hump in flows which results in a surplus on this account.
The
silver lining, however, is in the form of remittances by overseas
Indians. Remittances touched a new high and even net foreign direct
investment (FDI), which continued to be robust despite a huge growth in
outbound FDI.
Government managers reckon that it is too early
to set-off the alarm bells. Last week, chief economic advisor Arvind
Virmani told ET that the net (negative) effect of the oil price spurt
on the current account deficit could be much less than what pessimists
portend. This is because high oil prices (now at $143 a barrel) result
in a higher income and demand for goods and services from oil exporting
countries, which could be an opportunity for India, he said. According
to Aditya Birla group chief economist Ajit Ranade it is quite
heartening to note that despite high crude prices, the current account
deficit at 1.5% of GDP is still within acceptable levels. "But we will
have to watch out in the next quarter. If there is a slowdown in the
global economy, we need to be also vigilant about the slackening of
inflows through services exports," he said.
Yes
Bank chief economist Shubhada Rao said that the current account deficit
was entirely due to the crude import bill. If crude prices continue to
be over $130 a barrel, the current account will remain under stress.
The overall balance of payments for the quarter ended in a surplus of
$24.99 billion ($20.45 billion) on the back of better capital inflows
of $25.4 billion ($17.13 billion) during the quarter.
The current account deficit for the full fiscal year widened
by a further $17.4 billion, 78% higher than previous year's deficit of
$9.77 billion. Remittances also continued to post a strong growth. The
year ended with the highest ever remittances as reflected in private
transfers at $40.78 billion as against $27.94 billion a year ago. Net
invisibles including remittances, software services income and
investment income 36% increased from $53.4 billion to $72.65 billion.
Capital account surplus during the quarter amounted to $25.42 billion
during the quarter ended March 2008 driven largely by strong growth in
FDI, portfolio investment and borrowings by India Inc.
For the
full financial year, the capital account surplus more than doubled to
$108 billion, compared to $45.77 billion last year. Foreign direct
investment ($15.54 billion), portfolio investment ($29 billion) and
external commercial borrowings ($22.11 billion) accounted for a bulk of
net capital inflows during the year.