BOP data for Q3 sounds a new warning

BoP data for Q3 sounds a new warning
The situation triggers fears of the twin-deficit problem that preceded
the onset of the balance of payments crisis in '90
Asit Ranjan Mishra
New Delhi: In yet another signal of the growing vulnerability of the
Indian economy, data for the third quarter (Q3) ended December,
released by the Reserve Bank of India (RBI) on Tuesday, shows that
some parameters have progressively deteriorated over the year and are
close to levels touched during the economic crisis of 1990, though the
cushion of a $238 billion (Rs12.14 trillion) foreign currency reserve
provides succour.
Also See Sinking Fortunes (Graphic)
With the combined fiscal deficit of the states and the Centre likely
to hit a record high of 12% of gross domestic product (GDP), the
latest data has triggered fears of the twin-deficit—current account
and fiscal deficit—problem that preceded the onset of the balance of
payments (BoP) crisis in 1990.
The latest development comes against the backdrop of an estimated loss
of half-a- million jobs and contraction in industrial growth and
exports in December and January.
India's current account deficit, or the difference between exports and
imports of goods and services, during Q3 of the fiscal 2008-09
(October-December) widened to $14.6 billion, the highest quarterly
deficit since 1990. At this level, the current account deficit in Q3
aggregated 5.43% of GDP.
The current account deficit more than offset the capital inflows into
the country, resulting in a deficit on the capital account of BoP for
the first time in a quarter in 10 years. The combined impact led to a
drawdown of India's forex reserves by $17.88 billion.
During Q3, while foreign institutional investors (FIIs) withdrew $5.7
billion, there was an outflow of banking capital, excluding deposits
by non-resident Indians (NRIs) of $6 billion from India. However, NRI
deposits increased to $1 billion, compared with $259 million receipts
during the second quarter (Q2) of fiscal year 2009.
Analysts, however, maintain that while the outlook will improve in
2009-10, the rupee could come under further pressure.
"Certainly, the balance of payments is under stress. However, we are
getting some relief on current account front as imports are also
declining. I hope FY10 will be much better on the BoP front than FY09.
We may have a small BoP surplus in FY10 compared to a deficit in
FY09," said Abheek Barua, chief economist at HDFC Bank Ltd.
The main reason for the deterioration in the current account deficit
is the sudden slump in net invisibles in Q3 to $21.6 billion, from
$25.6 billion in Q2 ended September.
Invisibles receipts registered a marginal decline of 0.6% in Q3 on
account of a decline in travel, transportation and insurance receipts
in the services category and private transfers.
Software exports, contracted by 10% compared to the second quarter
ended September.
Exports extended last quarter's slump, dropping 16% in January from a
year earlier, the biggest slide in a decade.
As a result, the rupee has rapidly depreciated, tumbling by 21% in the
last one year to touch an all-time low of Rs52.185 to the dollar on 3
March. The rupee is the second-worst performer in the period among the
10 most-used currencies in Asia outside Japan.
The Asian Development Bank in its Asian Development Outlook 2009
released on Tuesday said that India's current account deficit will
narrow to 1.5% of GDP in FY10 but then widen a little to 2% of GDP in
the following year. "Capital inflows will remain under stress
throughout FY10. A weakening capital account will put pressure on the
Indian rupee to depreciate. In FY10, a fall of about 10% in exports
and imports, will improve the trade and current account deficits,
since imports are larger than exports," it said.