External imbalances came to the fore during 2012-13 as the CAD-GDP ratio reached an all time high of 6.7 per cent in Q3 mainly on account of the growing trade deficit. Although non-oil non-gold imports have decelerated in recent months, the sticky oil and gold imports resulted in the widening of trade deficit. However, the overall balance of payments was in marginal surplus due to strong capital inflows, led by FII investments. In Q4 of 2012-13, CAD is expected to have narrowed on the back of a turnaround in export growth and stabilisation of import growth. The recent moderation in commodity prices, including oil and gold will also help reduce the pressure on the current account. Despite these factors, the CAD is likely to remain above sustainable level. This requires policy attention, as the lumpiness and volatility of capital flows expose CAD financing to risks of sudden stops and reversals in these flows.
No definitive signs of global recovery
III.1 During 2012, global trade expanded at its slowest pace since the mid-1990s with the exception of a large contraction in 2009. Slow growth in the advanced economies (AEs) continued to remain a weak link in global trade expansion, while emerging market and developing economies (EMDEs) seem to be contributing to global trade through increased intra-industry and South-South trade. The upturn in world exports in Q4 of 2012, though small, was largely supported by the relatively better growth performance in EMDEs, while exports from AEs showed contraction (Chart III.1). Going forward, the lower-than-expected growth in China in Q1 of 2013 comes as a dampener, and tilts towards downside the overall balance of risks to the global economic and trade outlook.
Exports pick-up in Q4 of 2012-13
III.2 Reflecting the modest increase in trade activities across EMDEs, India’s merchandise exports showed a turnaround from December 2012 after a subdued performance in previous months (Table III.1 and Chart III.2a). In Q4 of 2012-13, export growth at 4.7 per cent was higher compared with 4.0 per cent in the corresponding period of 2011-12. While the recovery in exports in January 2013 was mainly due to higher demand from Saudi Arabia, Malaysia and a few African economies, the exports to China continued to contract. Commodity-wise data show that export pick-up was confined to a few sectors. Petroleum products, oil cakes, gems and jewellery, engineering goods and cotton yarn accounted for more than 75 per cent of the total rise in exports in Q4 of 2012-13.
III.3 Notwithstanding a modest increase in exports in recent months, the trade deficit remained significantly higher in 2012-13. In fact, the non-oil non-gold trade balance has shown an improvement since November 2012, turning mildly positive in February 2013 (Chart III.2b). Net imports of POL and gold accounted for nearly 82 per cent of India’s trade deficit during 2012-13.
III.4 In the recent period, the government undertook a slew of measures to address the high trade deficit attributed to low exports and high POL and gold imports. In January 2013, the government authorised oil marketing companies to hike diesel prices on a monthly basis, thereby allowing gradual deregulation of diesel prices.
Table III.1: India’s Merchandise Trade |
(US$ billion) |
Item |
April–March |
2011-12 R |
2012-13 P |
Value |
Growth
(%) |
Value |
Growth
(%) |
1 |
2 |
3 |
4 |
5 |
Exports |
306.0 |
21.8 |
300.6 |
-1.8 |
Of which: Oil |
56.0 |
35.1 |
60.0 |
7.1 |
Non-oil |
249.9 |
19.2 |
240.6 |
-3.7 |
Gold |
6.7 |
10.8 |
6.5 |
-3.5 |
Non-Oil Non-Gold |
243.2 |
19.5 |
234.1 |
-3.8 |
Imports |
489.3 |
32.3 |
491.5 |
0.4 |
Of which: Oil |
155.0 |
46.2 |
169.3 |
9.2 |
Non-oil |
334.4 |
26.7 |
322.2 |
-3.6 |
Gold |
56.5 |
38.9 |
54.0 @ |
-4.4 |
Non-Oil Non-Gold |
277.9 |
24.5 |
268.3 @ |
-3.5 |
Trade Deficit |
-183.4 |
|
-190.9 |
|
Of which: Oil |
-98.9 |
|
-109.3 |
|
Non-oil |
-84.4 |
|
-81.7 |
|
Non-Oil Non-Gold |
-34.7 |
|
-34.2 |
|
@: Based on RBI estimates R: Revised P: Provisional |
III.5 To curb the import demand for gold,
the customs duty on gold import was raised
further from 4 per cent to 6 per cent in January
2013. Under the Gold Deposit Scheme, the
central government has allowed mutual funds /
ETFs to deposit part of their gold with the banks.
Recognising the concerns relating to high gold imports and its impact on India’s CAD, the Union Budget 2013-14 emphasised that the
household sector must be incentivised to save
in financial instruments rather than buy gold
and hence, proposed various measures including
the introduction of inflation-indexed bonds.
CAD risks may moderate in the near term,
though structural impediments remain
III.6 The current account deficit (CAD) rose
to a historical high of 6.7 per cent of GDP in
Q3 of 2012-13 (Table III.2). On BoP basis,
merchandise exports remained almost stagnant
at level achieved in Q3 of 2011-12. Though,
sluggish global demand has largely been
responsible for continued weak exports, there
is a need to address domestic policy issues
impeding export growth. For example, despite
being one of the major coal producers in the
world, India had to import 113 million tonnes
during the period April 2012-January 2013,
which is a jump of 29 per cent, on top of a rise
of 47 per cent witnessed during the previous
year. In 2012-13, diesel consumption increased
by 6.8 per cent over 2011-12.
III.7 Other major sources of current receipts,
viz., exports of services, most notably software,
and private transfers also decelerated and were
thus inadequate to offset the impact of the high
trade deficit on the current account balance.
Non-oil non-gold imports have continued to
decelerate, broadly tracking the slowdown in
GDP growth (Chart III.3). In contrast, despite various dampening factors such as slowdown
in growth, depreciation of the rupee and policy
measures like duty hike on gold, the demand
for oil and gold imports has remained significant.
Table III.2: Major Items of India's Balance of Payments |
(US $ billion) |
|
2011-12
(PR) |
2011-12 |
2012-13 |
Q1
(PR) |
Q2
(PR) |
Q3
(PR) |
Q4
(PR) |
Q1
(PR) |
Q2
(PR) |
Q3
(P) |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
1. Goods Exports |
309.8 |
78.8 |
79.6 |
71.5 |
80.0 |
76.7 |
69.8 |
71.8 |
2. Goods Imports |
499.5 |
123.7 |
124.1 |
120.1 |
131.7 |
119.1 |
118.1 |
131.4 |
3. Trade Balance (1-2) |
-189.7 |
-44.9 |
-44.5 |
-48.6 |
-51.7 |
-42.4 |
-48.3 |
-59.6 |
4. Services Exports |
140.9 |
33.7 |
32.3 |
37.3 |
37.7 |
34.8 |
34.6 |
36.5 |
5. Services Imports |
76.9 |
17.4 |
18.3 |
21.1 |
20.0 |
20.7 |
19.4 |
18.9 |
6. Net Services (4-5) |
64.0 |
16.3 |
14.0 |
16.1 |
17.7 |
14.1 |
15.2 |
17.6 |
7. Goods & Services Balances (3+6) |
-125.7 |
-28.6 |
-30.5 |
-32.5 |
-34.0 |
-28.3 |
-33.1 |
-42.0 |
8. Primary Income (Net) |
-16.0 |
-3.6 |
-4.0 |
-3.8 |
-4.6 |
-4.9 |
-5.6 |
-6.3 |
9. Secondary Income (Net) |
63.5 |
14.8 |
15.6 |
16.2 |
16.9 |
16.8 |
16.1 |
15.7 |
10. Net Income (8+9) |
47.5 |
11.2 |
11.6 |
12.4 |
12.3 |
11.9 |
10.5 |
9.4 |
11. Current Account Balance (7+10) |
-78.2 |
-17.4 |
-18.9 |
-20.2 |
-21.7 |
-16.4 |
-22.6 |
-32.6 |
12. Capital Account Balance |
-0.1 |
-0.3 |
0.2 |
0.1 |
-0.2 |
-0.3 |
-0.2 |
0.01 |
13. Financial Account Balance |
80.7 |
18.7 |
19.0 |
20.6 |
22.4 |
15.8 |
23.9 |
31.1 |
of which: Change in Reserves* |
12.8 |
-5.4 |
-0.3 |
12.8 |
5.7 |
-0.5 |
0.2 |
-0.8 |
14. Errors & Omissions (11+12-13) |
-2.4 |
-0.9 |
-0.4 |
-0.5 |
-0.6 |
0.9 |
-1.0 |
1.6 |
Memo: As a ratio to GDP |
|
|
|
|
|
|
|
|
15. Trade Balance |
-10.1 |
-9.7 |
-9.8 |
-10.6 |
-10.5 |
-9.9 |
-11.5 |
-12.3 |
16. Net Services |
3.3 |
3.6 |
3.1 |
3.5 |
3.5 |
3.3 |
3.6 |
3.6 |
17. Net Income |
2.5 |
2.4 |
2.6 |
2.7 |
2.5 |
2.8 |
2.5 |
1.9 |
18. Current Account Balance |
-4.2 |
-3.8 |
-4.2 |
-4.3 |
-4.4 |
-3.9 |
-5.4 |
-6.7 |
19. Capital and Financial Account, Net (Excl. changes in reserves) |
3.6 |
5.2 |
4.3 |
1.7 |
3.3 |
3.7 |
5.6 |
6.5 |
Notes: * : -/+ sign implies increase/decrease in reserves, respectively.
Total of subcomponents may not tally with aggregate due to rounding off.
P: Preliminary; PR: Partially Revised |
III.8 Global commodity prices, especially of
oil and gold, have fallen recently. The softening
of oil prices mainly reflects the subdued growth
outlook for some advanced economies and also
China. With the strengthening of US dollar, the
role of gold as a safe haven asset may have
weakened. Apart from that, the possibility of
gold sale by some indebted euro area economies
also appears to be the cause of fall in gold prices.
Consequent to decline in oil and gold prices,
pressures on the CAD in the short-run may have
eased but there is hardly any space for
complacency.
III.9 While the CAD, even at this large level,
could be fully financed by capital inflows during
2012-13, volatility in such flows remains a risk.
Given the slowing growth and attendant macro-financial risks, as also the possibilities of global ‘risk off’ turning into global ‘risk on’ leading to
reversal of capital flows from emerging markets,
it is necessary to lower external sector risks by
lowering the CAD to its sustainable level and
not become complacent about external inflows.
Overall, private sector external debt has become
large and, going forward, some prudence may
be necessary on external commercial borrowing
(ECBs) and short-term trade credit.
Capital flows continue to be strong,
enabling CAD financing
III.10 Even though the CAD rose sharply in
Q3 of 2012-13, net capital flows were able to
finance it fully and there was even a marginal
accretion to foreign exchange reserves
(Table III.3). While portfolio flows broadly
tracked the global optimism in Q4 of 2012-13, domestic policy measures also served as pull factors to attract FII flows to India. In addition
to increasing FII limits in debt securities (both
corporate and government) in Q3, various
policy announcements in Q4, viz., (i) postponing
the implementation of the General Anti-
Avoidance Rule (GAAR) by two years,
(ii) simplification of ‘Know Your Customer’
registration rules for overseas investors and
(iii) removal of separate limits for FIIs on
different types of corporate bonds may have
improved the market sentiment. The recent fall
in global commodity prices has somewhat
alleviated CAD risks and thus attracted greater FII inflows, though its financing remains a
challange.
III.11 While non-debt flows picked up in Q4,
there was a mixed trend in the major components of debt-creating flows. While NRI deposits
moderated in Q4, net flows in the form of ECBs
showed an increase (Table III.4). Moderation
in NRI deposits might be partly reflecting the
subdued income growth conditions in major
source countries. During Q4, ECBs have been
raised mainly to fund the power sector,
modernisation, import of capital goods and
new projects. In view of rising private external
debt, it is important to keep in view the end-use
of ECBs.
Table III.3: Disaggregated Items of Financial Account |
(US$ billion) |
|
2011-12
(PR) |
2011-12 |
2012-13 |
Q1
(PR) |
Q2
(PR) |
Q3
(PR) |
Q4
(PR) |
Q1
(PR) |
Q2
(PR) |
Q3
(P) |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
1. Direct Investment (net) |
22.1 |
9.3 |
6.5 |
5.0 |
1.4 |
3.9 |
8.9 |
2.5 |
1.a Direct Investment to India |
33.0 |
12.4 |
9.5 |
6.9 |
4.2 |
5.9 |
10.3 |
4.8 |
1.b Direct Investment by India |
-10.9 |
-3.1 |
-3.0 |
-1.9 |
-2.9 |
-2.1 |
-1.4 |
-2.3 |
2. Portfolio Investment |
16.6 |
2.3 |
-1.4 |
1.8 |
13.9 |
-2.0 |
7.6 |
8.6 |
2.a Portfolio Investment in India |
16.8 |
2.5 |
-1.6 |
1.9 |
14.1 |
-1.7 |
7.9 |
9.8 |
2.b Portfolio Investment by India |
-0.2 |
-0.2 |
0.2 |
-0.04 |
-0.2 |
-0.3 |
-0.3 |
-1.2 |
3. Financial Derivatives & Employee Stock Options |
- |
- |
- |
- |
- |
-0.6 |
-0.5 |
-0.4 |
4. Other Investment |
29.2 |
12.6 |
14.2 |
1.0 |
1.4 |
15.1 |
7.7 |
21.0 |
4.a Other equity (ADRs/GDRs) |
0.6 |
0.3 |
0.2 |
0.1 |
0.03 |
0.1 |
0.1 |
0.2 |
4.b Currency and deposits |
12.1 |
1.2 |
3.1 |
3.2 |
4.6 |
6.4 |
3.5 |
2.6 |
Deposit-taking corporations, except the central bank: (NRI Deposits) |
11.9 |
1.2 |
2.8 |
3.3 |
4.7 |
6.6 |
2.8 |
2.7 |
4.c Loans* |
16.8 |
14.9 |
9.5 |
-7.7 |
-0.03 |
3.8 |
3.2 |
7.1 |
4.c.i Loans to India |
15.7 |
14.9 |
8.9 |
-8.1 |
-0.02 |
3.7 |
3.5 |
7.2 |
Deposit-taking corporations, except the central bank |
4.1 |
11.5 |
3.9 |
-8.7 |
-2.6 |
3.0 |
2.0 |
2.7 |
General government (External Assistance) |
2.5 |
0.4 |
0.3 |
1.4 |
0.3 |
0.3 |
0.2 |
1.5 |
Other sectors (ECBs) |
9.1 |
3.0 |
4.7 |
-0.8 |
2.3 |
0.4 |
1.2 |
3.1 |
4.c.ii Loans by India |
1.0 |
-0.02 |
0.6 |
0.5 |
-0.01 |
0.1 |
-0.3 |
-0.1 |
General government (External Assistance) |
-0.2 |
-0.04 |
-0.04 |
-0.04 |
-0.04 |
-0.1 |
-0.1 |
-0.1 |
Other sectors (ECBs) |
1.2 |
0.02 |
0.6 |
0.5 |
0.03 |
0.1 |
-0.3 |
-0.1 |
4.d Trade credit and advances |
6.7 |
3.1 |
2.9 |
0.6 |
0.2 |
5.4 |
4.1 |
6.2 |
4.e Other accounts receivable/payable – other |
-6.9 |
-6.8 |
-1.5 |
4.8 |
-3.3 |
-0.6 |
-3.2 |
5.0 |
5. Reserve assets |
12.8 |
-5.4 |
-0.3 |
12.8 |
5.7 |
-0.5 |
0.2 |
-0.8 |
Financial Account (1+2+3+4) |
80.7 |
18.7 |
19.0 |
20.6 |
22.4 |
15.8 |
23.9 |
31.1 |
Note: Total of subcomponents may not tally with aggregate due to rounding off.
P: Preliminary; PR: Partially Revised
*: Includes External Assistance, ECBs, non-NRI Banking Capital and short term trade credit. |
Rupee remained range bound, supported
by portfolio flows
III.12 The trend of a stronger rupee observed
during December 2012 to early-February 2013
was mainly supported by portfolio capital flows
and various reform measures announced during
the period. Even though the rupee witnessed
some weakness during the second week of
February to early March, it remained largely
range-bound with some subsequent appreciation
during April 2013. In Q4, the level of the real
effective exchange rate (i.e., REER based on 6
and 36 currency baskets) remained almost at
the level recorded in Q3 (average basis). REER
witnessed some depreciation during 2012-13
(Table III.5).
External debt, particularly short-term debt,
rose further in Q3
III.13 India’s external debt increased to US$
376 billion as at end-December 2012, reflecting
continued dependence on ECBs and short-term
borrowings to meet the widening CAD (Table III.6). Short-term debt on a residual
maturity basis has risen by about US$ 19 billion
in the first three quarters of 2012-13.
Table III.4: Capital Flows |
(US$ billion) |
Component |
2011-12 |
2012-13 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
Average of monthly flows |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
FDI in India |
4.1 |
3.1 |
2.3 |
1.5 |
2.0 |
3.4 |
1.8 |
2.9* |
FDI by India |
1.0 |
1.0 |
0.6 |
1.0 |
0.7 |
0.5 |
0.8 |
0.1 |
FIIs |
0.8 |
-0.5 |
0.6 |
4.7 |
-0.6 |
2.6 |
3.3 |
3.8 |
ECB |
1.0 |
1.6 |
-0.3 |
0.8 |
0.1 |
0.4 |
1.0 |
1.3 |
NRI |
0.4 |
0.9 |
1.1 |
1.6 |
2.2 |
0.9 |
0.9 |
0.7* |
*: January-February 2013. |
Vulnerability indicators weakened further
III.14 India’s external sector vulnerability
indicators deteriorated further in Q3 of 2012-13 (Table III.7). Reflecting the sharper rise in
external debt as compared to growth in nominal
GDP (in rupee terms), the ratio of external debt
to GDP increased in Q3. Similarly, the import
cover declined marginally, as imports were
spurred largely by oil and gold imports during
the period. Reflecting the widening CAD, the
net international investment liabilities-GDP
ratio increased to 15.4 per cent at end-December
2012 from 15.1 per cent at end-September
2012.
Sustained efforts needed to bring the CAD to sustainable levels, though fall in
commodity prices brings temporary respite
III.15 Export growth turned positive since
December 2012 and this bodes well for
narrowing the CAD in Q4 of 2012-13. Further,
the recent fall in the prices of gold and POL,
which constitute nearly 45 per cent of India’s
imports, may help alleviate the pressure on the
trade deficit and, in turn, on the CAD. Even
though the CAD-GDP ratio is likely to moderate
from Q4 of 2012-13, it may still remain above
the sustainable level in the short to medium term. Capital flows, particularly equity flows,
remain strong, mainly reflecting easy global
liquidity (push factor) and market participants’
expectations of higher returns from the Indian markets (pull factor). The reduced pressures on
the trade deficit coupled with higher capital
flows are likely to facilitate smooth financing
of the CAD. Nonetheless, several risks remain,
which require policy attention. First, even as
POL and gold prices cool off, the moderation
in CAD may still not be sufficient to bring it
down to the sustainable level. Second, apart
from POL and gold imports, there are also some
other impediments to CAD reduction. Indian
exports need to build productivity-based
competitiveness and in this context,
infrastructural constraints need to be addressed.
It would be erroneous to take comfort from factors that are exogenous in nature, such as the fall in oil and gold prices, without addressing
domestic structural problems. Third, even
though FII flows remain strong at the moment,
they may become volatile if global financial
conditions turn adverse. Moreover, the
continuation of these flows depends on the
growth prospects of the Indian economy and
any sign of uncertainty regarding these prospects
may hamper these flows. Fourth, the global
economic outlook is far from rosy and downside
risks remain substantial. Thus, sustaining Indian
export recovery in such an uncertain situation
would be a challenge that needs domestic efforts
to raise productivity-based competitiveness. To
sum up, though the recent developments have
given a temporary respite to CAD risks and have
eased the pressure on its financing, policy efforts
need to continue to bring it down to a sustainable
level.
Table III.5: Nominal and Real Effective
Exchange Rates: Trade-Based
(Base: 2004-05=100) |
|
Index Mar 28, 2013 (P) |
Y-o-Y Variation (Average) 2011-12 |
FY Variation (Mar 28, 2013 over-Mar 2012) |
1 |
2 |
3 |
4 |
36- REER |
95.8 |
-6.7 |
-2.7 |
36-NEER |
79.1 |
-10.4 |
-5.9 |
6-REER |
106.9 |
-5.9 |
-2.4 |
6-NEER |
76.8 |
-10.3 |
-5.9 |
`/US$ |
54.4 |
-11.9 |
-7.5 |
NEER: Nominal Effective Exchange Rate.
REER: Real Effective Exchange Rate.
P: Provisional.
Note: Rise in indices indicates appreciation of the rupee and vice versa. |
Table III.6: India's External Debt |
(US$ billion) |
Indicator |
End-
Mar
2012
(PR) |
End-
Jun
2012
(PR) |
End-
Sep
2012
(QE) |
End-
Dec
2012
(QE) |
Per cent
Variation
(end-Dec
2012
over
end-Sep
2012) |
1 |
2 |
3 |
4 |
5 |
6 |
1. Multilateral |
50.5 |
49.7 |
50.7 |
51.6 |
1.8 |
2. Bilateral |
26.9 |
27.4 |
27.9 |
26.3 |
-5.4 |
3. IMF |
6.2 |
6.0 |
6.1 |
6.1 |
-0.3 |
4. Trade Credit (above 1 year) |
19.0 |
19.1 |
19.1 |
18.5 |
-2.8 |
5. ECBs |
104.8 |
104.3 |
108.8 |
113.0 |
3.8 |
6. NRI Deposits |
58.6 |
60.9 |
67.0 |
67.6 |
0.9 |
7. Rupee Debt |
1.4 |
1.2 |
1.3 |
1.3 |
-3.7 |
8. Long-term (1 to 7) |
267.3 |
268.6 |
280.9 |
284.4 |
1.3 |
9. Short-term (Original Maturity) |
78.2 |
80.5 |
84.7 |
91.9 |
8.5 |
10. Short-term (Residual Maturity) # |
147.4 |
150.0 |
159.6 |
166.1 |
4.1 |
Total (8+9) |
345.5 |
349.1 |
365.6 |
376.3 |
2.9 |
PR: Partially Revised. QE: Quick Estimates. #: RBI Estimate.
Note: Growth rates are based on data up to 3 decimal points. |
Table III.7: External Sector Vulnerability
Indicators |
(per cent) |
Indicator |
End-Mar 2012 |
End-Sep 2012 |
End-Dec 2012 |
1 |
2 |
3 |
4 |
1. Ratio of Total Debt to GDP* |
19.7 |
19.3 |
20.6 |
2. Ratio of Short-term to Total Debt (Original Maturity) |
22.6 |
23.2 |
24.4 |
3. Ratio of Short-term to Total Debt (Residual Maturity)# |
42.6 |
43.7 |
44.1 |
4. Ratio of Concessional Debt to Total Debt |
13.9 |
13.2 |
12.5 |
5. Ratio of Reserves to Total Debt |
85.2 |
80.7 |
78.6 |
6. Ratio of Short-term Debt to Reserves |
26.6 |
28.7 |
31.1 |
7. Ratio of Short-term Debt (Residual Maturity) to Reserves# |
50.1 |
54.1 |
56.2 |
8. Reserves Cover of Imports (in months) |
7.1 |
7.2 |
7.1 |
9. Debt-Service Ratio (Debt Service Payments to Current Receipts) |
6.0 |
6.0 |
5.8 |
10. Net International Investment Position (NIIP) (US$ billion) |
-248.5 |
-271.5 |
-282.0 |
11. NIIP/GDP ratio |
-13.3 |
-15.1 |
-15.4 |
* : Annualised GDP at current market prices.
- : Not available. #: RBI Estimate. |
|