The balance of payments (BoP) came under significant stress in Q3 of 2011-12. Net capital inflows fell short of the current account deficit (CAD), resulting in a substantial drawdown of reserves. A wider CAD, rising external debt, weakening net international investment position
(NIIP) and deteriorating vulnerability indicators underscore the need for greater prudence in
external sector and demand management policies. While capital inflows have improved in Q4,
global uncertainties, moderation in the economic growth of emerging and developing economies (EDEs), which now have a significant share in India’s exports and persistently high oil prices
generate downside risks to the external outlook.
BoP comes under stress, warrants caution
III.1 The balance of payments (BoP) came under stress during Q3 of 2011-12 due to
deterioration of the trade balance and moderation
in capital inflows. The trade balance deteriorated
despite the depreciation of the rupee in the
quarter, due to the inelastic nature of some of
India’s imports, as well as a slowdown in
exports that reflected global uncertainty. The full year CAD for 2011-12 is likely to be substantial. Going forward, the CAD may still
remain under pressure if import of oil and gold
does not significantly moderate. Robust gold
demand and continuing high crude oil prices,
along with decelerating growth in EDEs may
adversely affect India’s trade balance. A cautious approach with regard to trade and
capital accounts is, therefore, required.
III.2 Subdued global trends also adversely
affected capital inflows to India in Q3, in line
with the trend witnessed in some other EDEs.
Even though capital inflows improved in Q4 of
2011-12, the continuation of the trend hinges
on the pace of global and domestic economic
recovery as well as policy reform initiatives.
Risks to capital inflows exist from both global
growth slowing down significantly as well as
US growth rebounding substantially.
Trade deficit widening despite weaker rupee and slower growth
III.3 India’s trade deficit widened considerably
during April-February 2011-12 compared with
the corresponding period of the previous year,
owing to subdued export growth coupled with high imports (Table III.1 and Chart III.1).
Notwithstanding the rupee depreciation, the trade deficit increased primarily due to a slowdown in global demand, inadequate passthrough of higher global oil prices and the
relatively price inelastic nature of some of
India’s imports, viz., gold and silver. Even the
growth in non-oil non-gold imports remained
sizeable despite signs of a slowdown in the domestic economy. Given the adverse global
environment and elevated global crude oil
prices, India’s trade deficit may remain high in
near future. A slight moderation may, however,
be expected in imports of gold following the
increase in import duty announced in the Union
Budget for 2012-13.
Export growth may weaken despite
continued trade diversification
III.4 India took major strides in diversifying its export markets in recent years. A shift in the
share from traditional markets in advanced
economies to new markets in EDEs is clearly
discernible. However, exports to all major group
of economies slowed due to euro area crisis in
Q3 of 2011-12 (Chart III.2). Growth deceleration
in exports to the OPEC and EDEs was, however,
more pronounced than that for the OECD
economies. Notwithstanding the slowdown,
EDEs continued to account for a major share of
42.7 per cent in India’s exports. It may be noted
that within the group of EDEs, the respective
shares of the African and Latin American
economies increased in Q3 of 2011-12. If growth in India’s major trading partner economies continues to remain sluggish, as projected by the IMF, India’s export growth may
decelerate further.
Table III.1 : India’s Merchandise Trade |
(US$ billion) |
Item |
2009-10 (R) |
2010-11 (P) |
April-February |
2010-11 (P) |
2011-12 (P) |
Absolute |
Growth (%) |
Absolute |
Growth (%) |
Absolute |
Growth (%) |
Absolute |
Growth (%) |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
Exports |
178.8 |
-3.5 |
251.1 |
40.5 |
220.3 |
39.0 |
267.4 |
21.4 |
Of which: Oil |
28.2 |
2.3 |
41.4 |
46.9 |
36.3 |
48.4 |
53.0 |
46.0 |
Non-oil |
150.6 |
-4.6 |
209.7 |
39.3 |
184.0 |
37.2 |
214.4 |
16.5 |
Imports |
288.4 |
-5.0 |
369.8 |
28.2 |
335.5 |
29.7 |
434.2 |
29.4 |
Of which: Oil |
87.1 |
-7.0 |
104.0 |
19.3 |
94.0 |
19.9 |
132.6 |
41.0 |
Non-oil |
201.2 |
-4.2 |
265.8 |
32.1 |
241.5 |
33.9 |
301.6 |
24.9 |
Trade Deficit |
-109.6 |
|
-118.7 |
|
-115.3 |
|
-166.8 |
|
Of which: Oil |
-58.9 |
|
-62.6 |
|
-57.7 |
|
-79.6 |
|
Non-Oil |
-50.6 |
|
-56.1 |
|
-57.5 |
|
-87.2 |
|
R: Revised. P: Provisional.
Source: DGCI&S. |
Persistently wide CAD has implications for
external resilience
III.5 The current account deficit (CAD) widened further in Q3 of 2011-12 reflecting the
impact of continuing global uncertainties as well as domestic factors. The CAD at 4.3 per cent of GDP in Q3 of 2011-12 was significantly
higher than 2.3 per cent recorded in Q3 of 2010-
11 (Table III.2). The widening of CAD to these levels does pose a challenge for external sector management. Moderation in capital and finance account (excluding change in reserves)
necessitated the financing of CAD by drawing
down foreign exchange reserves in Q3 of 2011-
12, which shows the weakening external resilience of the Indian economy (Table III.3).
Capital flows responded to policy measures
III.6 Capital inflows remained subdued in Q3
amidst fragile global financial conditions, the euro area crisis and a worsening global economic outlook. Recognising the impact of global developments, various measures were undertaken in Q2 and Q3 to facilitate inflows: deregulation of interest rates on rupee denominated NRI deposits and enhancing the all-in-cost ceiling for ECBs with average maturity of 3-5 years. Furthermore, the lock-in
period of long-term infrastructure bonds for FIIs (up to US$ 5 billion within the overall ceiling of US$ 25 billion) was reduced to one year, and ceilings for FIIs in government securities and corporate bonds were raised by
US$ 5 billion each. Capital flows under these segments responded positively to the policy
measures. FII inflows picked up significantly,
in both equity and debt, in January and
February, while FDI inflows remained broadly
stable. Besides, while ECB inflows improved
in Q4, NRI deposits remained stable (Table III.4). Trends in capital flows in coming
quarters, however, will largely depend on
global and domestic economic and financial conditions, including the pace of domestic
policy reforms. It must be noted that even
though debt inflows provide a means for financing the CAD, they have implications for India’s external debt position and, consequently,
for financial stability.
|
Table III.2: Major Items of India’s Balance of Payments |
(US$ billion) |
|
2010-11 |
2010-11 |
2011-12 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 (PR) |
Q2 (P) |
Q3 (P) |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
1. Goods Exports |
250.6 |
55.2 |
52.0 |
66.0 |
77.4 |
74.4 |
76.5 |
71.2 |
2. Goods Imports |
381.1 |
87.2 |
89.0 |
97.4 |
107.4 |
115.6 |
119.8 |
118.8 |
3. Trade Balance(1-2) |
-130.4 |
-32.0 |
-37.0 |
-31.4 |
-30.0 |
-41.3 |
-43.4 |
-47.7 |
4. Services Exports |
131.7 |
26.5 |
31.1 |
38.8 |
35.3 |
33.0 |
32.4 |
36.7 |
5. Services Imports |
83.0 |
16.7 |
19.2 |
26.3 |
20.7 |
17.9 |
18.4 |
21.7 |
6. Net Services (4-5) |
48.7 |
9.7 |
11.9 |
12.5 |
14.6 |
15.1 |
14.0 |
15.0 |
7. Goods & Services Balances (3+6) |
-81.8 |
-22.3 |
-25.1 |
-19.0 |
-15.5 |
-26.2 |
-29.4 |
-32.6 |
8. Primary Income (Net) (compensation of
Employees and Investment Income) |
-17.3 |
-3.5 |
-4.8 |
-4.6 |
-4.5 |
-4.3 |
-4.6 |
-4.5 |
9. Secondary Income (Net) (Pvt. Transfers) |
53.1 |
13.1 |
13.0 |
13.4 |
13.6 |
14.8 |
15.6 |
17.5 |
10. Net Income (8+9) |
35.8 |
9.6 |
8.2 |
8.8 |
9.1 |
10.5 |
11.0 |
13.0 |
11. Current Account Balance (7+10) |
-46.0 |
-12.6 |
-16.9 |
-10.1 |
-6.3 |
-15.7 |
-18.4 |
-19.6 |
12. Capital and Financial Account Balance, Net (Excl. changes in reserves) |
62.0 |
17.3 |
21.6 |
14.0 |
9.1 |
22.2 |
17.2 |
8.2 |
13. Change in Reserves (-) increase / (+) decrease |
-13.1 |
-3.7 |
-3.3 |
-4.0 |
-2.0 |
-5.4 |
-0.3 |
12.8 |
14. Errors & Omissions (-) (11+12+13) |
-3.0 |
-0.9 |
-1.4 |
0.1 |
-0.8 |
-1.0 |
-1.5 |
-1.4 |
Memo: (as a percentage of GDP) |
15. Trade Balance |
-7.7 |
-8.5 |
-9.8 |
-7.0 |
-6.3 |
-9.1 |
-9.8 |
-10.5 |
16. Net Services |
2.9 |
2.6 |
3.1 |
2.8 |
3.0 |
3.3 |
3.1 |
3.3 |
17. Net Income |
2.1 |
2.6 |
2.2 |
2.0 |
1.9 |
2.3 |
2.5 |
2.9 |
18. Current Account Balance |
-2.7 |
-3.4 |
-4.5 |
-2.3 |
-1.3 |
-3.5 |
-4.1 |
-4.3 |
19. Capital and Financial Account, Net (Excl. changes in reserves) |
3.7 |
4.6 |
5.7 |
3.1 |
1.9 |
4.9 |
3.9 |
1.8 |
Note: Total of subcomponents may not tally with aggregate due to rounding off.
P: Preliminary. PR: Partially Revised. |
|
Table III.3: Disaggregated Items of Financial Account |
(US$ billion) |
|
Apr-Jun 2011 (PR) |
Apr-Jun 2010 (PR) |
Jul-Sept 2011 (PR) |
Jul Sept 2010 (PR) |
Oct-Dec 2011 (P) |
Oct -Dec 2010 (PR) |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
1. |
Direct Investment (net) |
7.8 |
3.5 |
4.0 |
3.6 |
4.5 |
1.2 |
|
1.a |
Direct Investment in India |
13.3 |
6.7 |
7.0 |
7.5 |
6.4 |
6.1 |
|
1.b |
Direct Investment by India |
-5.6 |
-3.3 |
-3.0 |
-3.9 |
-1.9 |
-4.9 |
2. |
Portfolio Investment |
2.3 |
3.5 |
-1.4 |
18.7 |
1.8 |
6.1 |
|
2.a |
Portfolio Investment in India |
2.5 |
3.5 |
-1.6 |
18.8 |
1.9 |
7.2 |
|
2.b |
Portfolio Investment by India |
-0.2 |
0.0 |
0.2 |
-0.1 |
0.0 |
-1.1 |
3. |
Other investment |
12.4 |
10.4 |
14.4 |
-0.7 |
1.8 |
6.6 |
|
3.a |
Other equity (ADRs/GDRs) |
0.3 |
1.1 |
0.2 |
0.5 |
0.1 |
0.2 |
|
3.b |
Currency and deposits |
1.2 |
1.1 |
2.8 |
0.4 |
3.2 |
0.3 |
|
|
Deposit-taking corporations, except the central bank: (NRI deposits) |
1.2 |
1.1 |
2.8 |
1.0 |
3.3 |
0.2 |
|
3.c |
Loans* |
15.2 |
7.6 |
9.5 |
0.4 |
-5.9 |
9.7 |
|
|
3.c.i |
Loans to India |
15.2 |
7.7 |
8.8 |
0.7 |
-6.4 |
9.3 |
|
|
|
Deposit-taking corporations, except the central bank |
11.5 |
2.9 |
3.9 |
-3.6 |
-8.7 |
4.6 |
|
|
|
General government (External Assistance) |
0.4 |
2.5 |
0.3 |
0.6 |
1.4 |
1.2 |
|
|
|
Other sectors (ECBs) |
3.3 |
2.3 |
4.6 |
3.7 |
0.9 |
3.5 |
|
|
3.c.ii |
Loans by India |
0.0 |
-0.1 |
0.6 |
-0.3 |
0.5 |
0.3 |
|
|
|
General government (External Assistance) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
|
|
Other sectors (ECBs) |
0.0 |
0.0 |
0.6 |
-0.3 |
0.5 |
0.3 |
|
3.d |
Trade credit and advances |
3.1 |
4.3 |
2.9 |
2.6 |
-0.1 |
1.3 |
|
3.e |
Other accounts receivable/payable |
-7.3 |
-3.7 |
-0.9 |
-4.6 |
4.5 |
-4.9 |
4. |
Reserve assets |
-5.4 |
-3.7 |
-0.3 |
-3.3 |
12.8 |
-4.0 |
Financial Account (1+2+3+4) |
17.0 |
13.6 |
16.7 |
18.3 |
20.9 |
9.9 |
Note: The total of sub-components may not tally with the aggregate due to rounding off.
*: Includes external assistance, ECBs, non-NRI banking capital and short term trade credit.
P: Provisional. PR: Partially revised. |
Rupee recovers in Q4 of 2011-12 after being volatile in Q3
III.7 In nominal terms, the rupee generally
depreciated against the US dollar from the last week of August 2011 to mid-December 2011
after being largely range bound during the first four months of 2011-12. Subsequently, the exchange rate stabilised in response to the
measures undertaken by the Reserve Bank and
the government aimed at improving dollar
supply in the foreign exchange market as also
to curb speculation. The magnitude of the intervention by the Reserve Bank, which
amounted to over US$ 20 billion up to February
2012, also helped to reduce volatility in the
foreign exchange market. The cumulative impact of these measures considerably reversed
the movement of the rupee against the US dollar
from the historical low of `54.2 per US dollar on December 15, 2011 to `49.7 per US dollar by end-January 2012. The rupee have weakened
somewhat recently as a result of volatility of capital flows.
Table III.4: Capital Flows in 2011-12 |
(US$ billion) |
Component |
2011-12 (Apr-Aug) |
2011-12 (Sep-Dec) |
2011-12 (Jan-Feb) |
(Monthly Average) |
1 |
2 |
3 |
4 |
FDI in India |
4.8 |
3 |
3.1 |
FDI by India |
1.0 |
0.8 |
0.8* |
FIIs (net) |
0.4 |
0.1 |
4.7* |
ADRs/GDRs |
0.1 |
0.1 |
0.0 |
ECB Inflows |
1.3 |
0.6 |
1.0 |
NRI Deposits (net) |
0.5 |
1.2 |
1.2 |
*: January-March. |
III.8 The real effective exchange rate (i.e.,
REER based on 6, 30 and 36 currency baskets)
witnessed appreciation in Q4 reflecting the recovery of the rupee in nominal terms that emanated from the impact of policy measures
to improve dollar supply in the foreign exchange market (Table III.5).
Table III.5: Nominal and Real Effective Exchange Rates – Trade based |
(Base: 2004-05=100) |
[Per cent, appreciation(+)/depreciation(-)] |
|
Index Mar.
30, 2012
(P) |
Year-on-Year Variation (Average) |
2011-12
(Dec. 2011 over Sep.
2011) |
2011-12
(Mar.
2012 over Dec.
2011) |
2008-09 |
2009-10 |
2010-11 (P) |
2011-12 (P) |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
36-REER |
94.2 |
-9.9 |
-3.2 |
8.0 |
-3.3 |
-8.1 |
4.7 |
36-NEER |
82.9 |
-11.0 |
-2.6 |
3.1 |
-6.5 |
-8.0 |
4.2 |
30-REER |
86.1 |
-10.3 |
-4.6 |
4.8 |
-2.9 |
-8.5 |
4.2 |
30-NEER |
85.2 |
-8.4 |
-2.2 |
1.1 |
-5.5 |
-7.9 |
3.8 |
6-REER |
105.5 |
-9.3 |
-0.3 |
13.0 |
-2.9 |
-7.9 |
4.2 |
6-NEER |
79.9 |
-13.6 |
-3.7 |
5.7 |
-7.5 |
-8.3 |
4.5 |
`/US$ (Average) |
48.0 |
-12.4 |
-3.2 |
4.0 |
-5.0 |
-9.6 |
4.7 |
`/US$ (end-March) |
51.2 |
-21.5 |
12.9 |
1.1 |
-12.7 |
-8.2 |
4.1 |
NEER : Nominal Effective Exchange Rate.
REER : Real Effective Exchange Rate.
P: Provisional.
Note: Rise in indices indicates appreciation of the rupee and vice versa.
|
Increase in external debt as ECB and short
-term debt rise
III.9 India’s external debt increased to US$
335 billion at end-December 2011 from US$
324 billion at end-September 2011 largely
reflecting a sharp increase in ECB and short term debt (Table III.6). Keeping in view the developments in international financial markets and global economic conditions, the Reserve
Bank enhanced the all-in-cost ceiling on ECBs
and deregulated interest rates on NRE and NRO accounts. The full year external debt is likely to
be higher reflecting greater reliance on debt flows to finance CAD. Nonetheless, it is expected that external debt will remain at a manageable level.
Table III.6: India’s External Debt |
(US$ billion) |
Item |
End-Mar 2011 (PR) |
End-Jun 2011 (PR) |
End-Sep 2011 (PR) |
End-Dec 2011 (P) |
Variation (end-Dec 2011
over end-Sep 2011) |
Amount |
Per cent |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
1. Multilateral |
48.5 |
49.4 |
49.1 |
49.9 |
0.8 |
1.6 |
2. Bilateral |
25.7 |
26.2 |
27.1 |
27.1 |
0.0 |
0.2 |
3. International Monetary Fund |
6.3 |
6.4 |
6.2 |
6.1 |
-0.1 |
-1.7 |
4. Trade Credit (above 1 year) |
18.6 |
18.7 |
19.5 |
19.9 |
0.4 |
1.9 |
5. External Commercial Borrowings |
88.8 |
93.4 |
96.8 |
100.1 |
3.3 |
3.3 |
6. NRI Deposits |
51.7 |
52.9 |
52.3 |
52.5 |
0.2 |
0.4 |
7. Rupee Debt |
1.6 |
1.6 |
1.4 |
1.3 |
-0.1 |
-8.8 |
8. Long-term (1 to 7) |
241.1 |
248.4 |
252.4 |
256.9 |
4.5 |
1.7 |
9. Short-term |
65.0 |
68.5 |
71.5 |
78.1 |
6.5 |
8.4 |
Total (8+9) |
306.1 |
316.9 |
323.9 |
334.9 |
11.0 |
3.3 |
P: Provisional. PR: Partially Revised. |
External vulnerability indicators show
deterioration
III.10 The key external sector vulnerability
indicators worsened in Q3 of 2011-12 (Table
III.7). The reserve cover of imports, the ratio of
short-term debt to total external debt, the ratio
of foreign exchange reserves to total debt, and
the debt service ratio deteriorated during the
quarter. India’s net international investment position (NIIP) also weakened as net liabilities
increased to US$ 216 billion at end-December 2011 from US$ 204 billion at end-September
2011. As a result, the NIIP-GDP ratio deteriorated
moderately in Q3 (Table III.8).
Table III.7: External Sector Vulnerability Indicators |
(Per cent) |
Indicator |
End-March 2010 |
End-June 2010 |
End-March 2011 |
End-June 2011 |
End-Sep 2011 |
End-Dec 2011 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
1. Ratio of Total Debt to GDP |
18.0 |
- |
17.8 |
15.9 |
17.8 |
20.0 |
2. Ratio of Short-term to Total Debt (Original Maturity) |
20.0 |
20.9 |
21.2 |
21.6 |
22.1 |
23.3 |
3. Ratio of Short-term to Total Debt (Residual Maturity) |
41.2 |
42.5 |
42.2 |
43.3 |
43.4# |
- |
4. Ratio of Concessional Debt to Total Debt |
16.8 |
15.9 |
15.5 |
15.1 |
14.8 |
14.3 |
5. Ratio of Reserves to Total Debt |
106.9 |
98.0 |
99.5 |
99.6 |
96.2 |
88.6 |
6. Ratio of Short-term Debt to Reserves |
18.8 |
21.0 |
21.3 |
21.7 |
23.0 |
26.3 |
7. Reserves Cover of Imports (in months) |
11.1 |
10.7 |
9.6 |
9.2 |
8.5 |
7.7 |
8. Reserves Cover of Imports and Debt Service Payments (in months) |
10.5 |
10.1 |
9.1 |
8.8 |
8.0 |
7.3 |
9. Debt Service Ratio (Debt Service Payments to Current Receipts) |
5.8 |
4.1 |
4.3 |
4.8 |
5.2 |
7.9 |
10. External Debt (US$ billion) |
261.0 |
270.3 |
306.1 |
316.9 |
323.9 |
334.9 |
-: Not available. #: RBI Estimate. |
Table III.8: Overall International Investment Position of India |
(US$ billion) |
Period |
Dec-10 (PR) |
Mar-11 (PR) |
Jun-11 (PR) |
Sep-11 (PR) |
Dec-11 (P) |
1 |
2 |
3 |
4 |
5 |
6 |
NIIP |
-210.0 |
-211.1 |
-224.6 |
-204.0 |
-215.7 |
Assets |
423.6 |
439.5 |
451.2 |
453.0 |
432.3 |
Liabilities |
633.5 |
650.6 |
675.7 |
657.0 |
648.0 |
NIIP-GDP Ratio* |
-13.1 |
-12.4 |
-12.4 |
-11.4 |
-12.0 |
P: Provisional. PR: Partially Revised.
* Based on annualised GDP. |
III.11 With significant downside risks to India’s external sector, caution is warranted in external sector policies and aggregate demand
management so that CAD does not widen further and the external account parameters remain at
prudent levels. In this regard, steps need to be
taken to facilitate a complete passthrough of
international commodity prices, especially by
raising domestic prices of petroleum products,
curb the demand for precious metals and
accelerate reforms to attract FDI. |