The data on India’s Balance of Payments (BoP) are published by the Reserve Bank on a quarterly basis with a lag of one quarter. This article presents the analysis of major developments in India’s BoP (i) during the fourth quarter (January-March) of 2012-13 and (ii) during 2012-13.

1. Balance of Payments during January-March (Q4) of 2012-13

Highlights

• India’s current account deficit (CAD) moderated sharply to 3.6 per cent of GDP in Q4 of 2012-13 from a historically high level of 6.5 per cent of GDP in Q3 of 2012-13 as trade deficit narrowed.

• Merchandise exports (BoP basis) increased by 5.9 per cent in Q4 of 2012-13 as compared with 2.6 per cent in Q4 of 2011-12. In contrast, imports declined marginally by 1.0 per cent as against a growth of 22.6 per cent in Q4 of 2011-12, owing mainly to a decline in non-oil non-gold imports, partly reflecting a decline in domestic activity.

• As a result, trade deficit narrowed down to US$ 45.6 billion in Q4 of 2012-13 from US$ 51.6 billion in Q4 of 2011-12.

• Net invisibles, however, recorded a decline of 7.7 per cent in Q4 of 2012-13 as compared to a growth of 27.5 per cent in Q4 of 2011-12 on account of a decline in net services, transfers and income receipts.

• Net capital inflows under financial account moderated in Q4 of 2012-13 largely due to slowdown in net portfolio investment and net repayment of loans by banks and corporates. However, net capital inflows were more than adequate to finance CAD, resulting in accretion of US$ 2.7 billion to the foreign exchange reserves.

The quarter ending March 2013 witnessed some signs of recovery as India’s merchandise exports increased and imports moderated, leading to narrowing down of trade deficit. There was, however, a decline in net invisible receipts owing to repayments which partly countered the positive impact of the narrowing trade deficit on CAD. The increase in capital flows, in the form of Foreign Direct Investment (FDI), External Commercial Borrowings (ECBs) and trade credit, however, could fully finance the CAD leading to an accretion of foreign exchange reserve (Table 1).

Goods Trade

• On BoP basis, India’s merchandise exports increased by 5.9 per cent to US$ 84.8 billion in Q4 of 2012-13 as compared to a growth of 2.6 per cent (US$ 80.0 billion) in Q4 of 2011-12.

• Pick up in exports could be attributed to better performance of products like tea, leather and manufactures, plastic and linoleum products, machinery and equipments, cotton yarn fabrics and carpets.

• Destination wise, exports to European Union, OPEC countries, particularly, Iran and Kuwait, recorded a sharp increase while export demand from North America, particularly, US and countries like China and Singapore remained subdued.

• Sluggish domestic economic activity and a decline in oil and gold imports caused moderation in import demand by 1.0 per cent to US$ 130.4 billion in Q4 of 2012-13 as against a growth of 22.6 per cent in Q4 of 2011-12 at US$ 131.7 billion.

• Gold imports witnessed a moderation in Q4 of 2012-13 as average international gold price declined by 3.6 per cent to US$ 1,631 per troy ounce, from US$ 1,691 per troy ounce in Q4 of 2011-12. With the strengthening of US dollar, the role of gold as a safe haven asset seems to have weakened. Apart from that, the possibility of gold sale by some indebted euro area economies also appears to be the cause for fall in gold prices.

• There was a slowdown in POL imports as well, partially facilitated by softening of oil prices, caused by subdued global demand from advanced economies and China. During the quarter, average price of Indian oil basket was lower by 6.6 per cent over the corresponding quarter of previous year.

Trade Deficit

• Rise in export growth coupled with a marginal decline in imports narrowed down the trade deficit to US$ 45.6 billion in Q4 of 2012-13 (about 9.0 per cent of GDP) from US$ 51.6 billion (10.5 per cent of GDP) in Q4 of 2011-12 (Chart 1).

Services

During the quarter, net services receipts recorded a decline of 3.9 per cent at US$ 17.0 billion over the corresponding quarter of 2011-12. The decline was mainly on account of slowdown in services exports coupled with a rise in the growth of services imports on a year-on-year basis.

• Services exports increased by 0.4 per cent to US$ 37.8 billion in Q4 of 2012-13 as compared to an increase of 6.8 per cent during the same quarter in the preceding year. Moderation in exports was mainly led by a decline in other business services like research and development, professional and management consulting, technical and trade related services.

• Imports of services grew at a faster rate of 4.2 per cent at US$ 20.9 billion in Q4 of 2012-13 as against a decline of 4.1 per cent in Q4 of 2011-12 on account of higher payments towards construction, telecommunication and other business services.

Income

There was a larger outflow on account of primary income amounting to US$ 5.2 billion in Q4 of 2012-13 as compared to an outflow of US$ 4.6 billion in Q4 of 2011-12 led by a decline in net investment income receipts. Net secondary income receipts also remained subdued due to a slowdown in personal remittances (Table 2).

• During Q4 of 2012-13, payments on account of investment income, comprising mainly the interest payments on the ECBs, NRI deposits and profits & reinvested earnings of FDI companies in India, grew by 12.1 per cent in Q4 of 2012-13 (decline of 4.8 per cent in Q4 of 2011-12) while investment income receipts, largely representing earning on foreign currency assets, recorded a decline of 4.5 per cent (decline of 16.6 per cent in Q4 of 2011-12). As a result, there was a net outflow of US$ 5.3 billion in Q4 of 2012-13 as compared to an outflow of US$ 4.5 billion in Q4 of 2011-12.

• Secondary income witnessed a moderation in net inflows to US$ 15.8 billion in Q4 of 2012-13 from US$ 16.9 billion in the corresponding period of 2011-12, reflecting a fall in net remittances from overseas Indians.

Current Account

Reduction in the trade deficit resulted in a significant narrowing down of CAD from US$ 31.9 billion in Q3 of 2012-13 to US$ 18.1 billion in Q4 of 2012-13 (US$ 21.7 billion in Q4 of 2011-12). As a percentage of GDP, CAD moderated sharply to 3.6 per cent of GDP in Q4 of 2012-13 from 6.5 per cent in Q3 of 2012-13 (4.4 per cent of GDP in Q4 of 2011-12) (Chart 2).

Capital and Financial Account

The capital account, which includes, inter alia, ‘net acquisition of non-produced non-financial assets’ and ‘other capital receipts including migrant transfers’ showed a negligible inflows on a net basis in Q4 of 2012-13. Net inflows under financial account, moderated in Q4 of 2012-13, mainly on account of a decline in net portfolio investment, non-resident deposits and net repayment of loans by banks (Table 3). Moderation in net portfolio investment mainly reflected the risk aversion strategy of foreign investors wary of India’s high CAD and a subdued economic outlook. In contrast, however, FDI quadrupled in Q4 of 2012-13 over Q4 of 2011-12 owing to the recent policy measures undertaken by the Government.

• While net direct investment rose to US$ 5.7 billion in Q4 of 2012-13 from US$ 1.4 billion in Q4 of 2011-12, net portfolio investment moderated to US$ 11.3 billion in Q4 of 2012-13 from US$ 13.9 billion in the corresponding quarter of the previous year. Moderation was more prominent in debt component of portfolio flows.

• Net repayment on account of external loans availed by banks rose sharply to US$ 6.3 billion in Q4 of 2012-13 from US$ 2.6 billion in Q4 of 2011-12.

• ‘Net external loans availed by non-Government and non-banking sectors’, i.e., net ECBs, nearly doubled to US$ 4.1 billion in Q4 of 2012-13 compared to US$ 2.3 billion in Q4 of 2011-12.

• The growing prominence of trade credit in financing imports was reflected in the increase in net inflows under ‘trade credit & advances’ amounting to US$ 4.5 billion in Q4 of 2012-13 as compared with US$ 0.2 billion in Q4 of 2011-12.

• Inflows under currency and deposits of commercial banks, i.e., NRI deposits, decelerated to US$ 2.8 billion in Q4 of 2012-13 from the previous year’s level of US$ 4.7 billion.

• Despite a moderation in net inflows under financial account, the inflows were sufficient to finance the CAD leading to an accretion of foreign exchange reserves by US$ 2.7 billion in Q4 as against a drawdown of US$ 5.7 billion in the corresponding quarter of 2011-12.

Balance of Payments during 2012-13

Highlights

• During 2012-13, CAD stood at US$ 87.8 billion (4.8 per cent of GDP) as against US$ 78.2 billion (4.2 per cent of GDP) during 2011-12.

• The net inflows under financial account during 2012-13 rose to US$ 85.4 billion from US$ 80.7 billion during the preceding year mainly on account of higher inflows under FII, nonresident deposits and short-term credit and advances.

• The increase in capital inflows led to an accretion to foreign exchange reserves by US$ 3.8 billion during 2012-13.

Notwithstanding an improved performance in Q4 of 2012-13, trade deficit in 2012-13 remained at an elevated level of US$ 195.7 billion on account of a decline in merchandise exports and marginal rise in imports. This coupled with decline in net invisible earnings due to higher outgo of investment income payments and only a modest rise in net services receipts led to widening of CAD. Nevertheless, higher inflows under financial account enabled full financing of CAD and led to an accretion to the foreign exchange reserves of US$ 3.8 billion.

Goods Trade

• In 2012-13, merchandise exports (on a BoP basis) recorded a decline of 1.1 per cent to US$ 306.6 billion compared to a growth of 20.9 per cent at US$ 309.8 billion in 2011-12.

• Merchandise imports, however, recorded a moderate increase of 0.5 per cent in 2012-13 at US$ 502.2 billion as compared with 30.3 per cent in 2011-12 amounting to US$ 499.5 billion, partly attributed to weakening domestic demand coupled with subdued demand for export related imports.

• At a disaggregated level, export performance remained subdued across all commodity groups which either decelerated or entered into a negative growth trajectory in 2012-13. The decline in exports was most significant in sectors like ores and minerals, manufactured goods like engineering goods, textile and textile products and labour intensive sectors like gems and jewellery and handicrafts.

• Moderation in imports was reflected across all sectors. The decline was, however, significant in sectors like petroleum, petroleum products and related material, fertilisers, iron and steel, capital goods, export related items like pearls, precious and semi precious stones, gold & silver and coal, coke and briquettes.

• During 2012-13, POL and gold imports continued to constitute nearly 45 per cent of total merchandise imports during the year. Despite a significant moderation in POL import growth from 46.2 per cent in 2011-12 to 9.3 per cent in 2012-13, oil imports remained at an elevated level of US$ 169.4 billion in 2012-13 as against US$ 155.0 billion in 2011-12. Imports of gold, however, declined to US$ 53.8 billion in 2012-13 from US$ 56.5 billion a year ago.

Trade Deficit

Trade deficit for 2012-13 widened to US$ 195.7 billion from US$ 189.7 billion in 2011-12 owing to sharper contraction in exports relative to imports. As a proportion of GDP, trade deficit rose marginally to 10.6 per cent in 2012-13 from 10.1 per cent in 2011-12.

Services

During 2012-13, net services receipts grew at a modest rate of 1.4 per cent amounting to US$ 64.9 billion as against a growth rate of 45.3 per cent at US$ 64.0 billion in 2011-12. The subdued performance of the service sector could be attributed to moderation in services export growth coupled with a rise in services payments.

• Moderation in the growth of services receipts was mainly on account of decline in earnings under transport, travel, insurance and pension services and financial services.

• Increase in services payments, on the other hand, was led by an increase in payments on account of construction services, telecommunication and information services and other business services like research and development services, technical and trade related services.

Income

Primary Income

Primary income, comprising mainly of investment income, compensation of employees and other primary receipts, witnessed a net outflow of US$ 21.5 billion during 2012-13 as compared with a net outflow of US$16.0 billion in the previous year mainly on account of larger outflow under investment income.

• While investment income receipts declined by 12.1 per cent to US$ 6.2 billion in 2012-13 from US$ 7.1 billion in the preceding year, reflecting lower interest/discount earnings on foreign exchange reserves, investment income payments rose by 21.2 per cent to US$ 28.8 billion in 2012-13 from US$ 23.7 billion in 2011-12.

• Rise in investment income payments during this period was largely reflective of sizeable increase in interest payments on growing foreign debt including NRI deposits, ECBs and short-term trade credit.

Secondary Income

• Net secondary income receipts, primarily comprising private transfers, increased by 1.4 per cent to US$ 64.4 billion during 2012-13 as compared with a growth of 19.5 per cent in 2011-12.

• NRI deposits, when withdrawn domestically, form part of private transfers as they become unilateral transfers and do not have any quid pro quo. During 2012-13, the share of local withdrawals in total outflows from NRI deposits was 63.4 per cent compared with a share of 62.0 per cent in the previous year (Table 4).

• As a proportion of total private transfers, inward remittances for family maintenance increased to 48.8 per cent in 2012-13 from 47.4 per cent in 2011-12. The share of local withdrawals from NRI deposits, however, declined to 47.3 per cent in 2012-13 from its previous year level of 49.2 per cent in 2011-12 (Table 5).

Current Account Balance

Burgeoning trade deficit, decline in net invisible earnings due to sharp increase in investment income payments and only a modest rise in net services receipts led to widening of CAD to US$ 87.8 billion in 2012-13 as against a CAD of US$ 78.2 billion in the previous year. As a proportion of GDP, CAD rose to 4.8 per cent in 2012-13 as compared with 4.2 per cent in 2011-12.

Capital and Financial Account

• There was a rise in net outflow under capital account of the amount US$ 0.3 billion in 2012-13 owing to increase in capital transfers.

• Notwithstanding decline in FDI flows to India, net inflows under financial account rose to US$ 85.4 billion in 2012-13 from US$ 80.7 billion a year ago primarily on account of increase in portfolio investment, non-resident deposits and short term credit and advances.

• Net FDI to India declined by 18.2 per cent from US$ 33.0 billion in 2011-12 to US$ 27.0 billion in 2012-13. The moderation in FDI to India was recorded under both equity and debt flows.

• Sector-wise FDI data reveal the fact that the decline in FDI inflows to India was mainly evident in manufacturing sector, communication services, construction and computer services (Table 6). Country-wise investment routed through Mauritius continued to be the largest source of investment, followed by Netherlands and Singapore (Table 7).

• Net FDI by India in 2012-13 was lower as compared to 2011-12 mainly on account of a marginal decline in fresh FDI by India and an increase in disinvestment/repatriation.

• Gross FDI outflows from India was recorded primarily in sectors like manufacturing, financial, insurance, real estate and business services, transport, storage and communication services, agriculture, hunting, forestry and fishing and wholesale, retail trade, restaurants and hotels (Table 6).

• Singapore constituted the largest recipient, followed by Mauritius and US in terms of gross outflows from India, while gross FDI inflows to India was mainly routed through Mauritius, followed by Netherlands, Singapore and Japan. (Table 7).

• During 2012-13, the outward FDI financed through equity rose by 12.9 per cent as against the loan component which declined by 23.3 per cent during the year. Accordingly, the share of equity in total outward FDI increased to 58.3 per cent in 2012-13 from 49.0 per cent in 2011-12 (Table 8).

• On a net basis, portfolio investment increased by 61.1 per cent to US$ 26.7 billion in 2012-13 from US$ 16.6 billion in 2011-12.

• Net inflows under currency and deposits by banking sector (NRI deposits) recorded a rise of 24.5 per cent to US$ 14.8 billion in 2012-13 from US$ 11.9 billion in 2011-12 which may be attributed to weakening of rupee and deregulation of interest rate on NRI deposits.

• Net loans availed by non-Government and nonbanking sectors (net ECBs) were lower at US$ 8.6 billion in 2012-13 compared with US$ 9.1 billion a year ago on account of lower fresh disbursal as well as large repayment of ECBs. Net inflows under short term credit increased sharply to US$ 21.7 billion in 2012-13 from US$ 6.7 billion in 2011-12 reflecting growing dependence on trade credits and advances for financing imports.

• Other receivables/payables’ that include “leads and lags in exports”, “net funds held abroad”, “advances received pending issue of shares under FDI” and “other capital not included elsewhere” recorded a net outflow of US$ 2.7 billion in 2012-13 compared with an outflow of US$ 6.9 billion in the previous year (Table 9).

Reserve Variation

Net capital inflows were sufficient to finance the CAD and there was an accretion to foreign exchange reserves to the extent of US$ 3.8 billion in 2012-13 as against a drawdown of reserves of an amount of US$ 12.8 billion in the previous year. At the end of March 2013, foreign exchange reserves stood at US$ 292.0 billion.

Difference between DGCI&S data and Balance of Payments data

• The data on imports based on DGCI&S (customs statistics) and the BoP (banking channel data) are given in Table 10. The difference between two sets of data are likely to get reduced when both the data sets are revised later.

* Prepared in the Division of International Trade and Finance, Department of Economic and Policy Research, Reserve Bank of India. Time series data on BoP are available on the RBI site at www.dbie.rbi.org.in. In addition, the disaggregated quarterly data on invisibles are being released separately on the RBI site.