Fickle FIIs help finance CAD

India’s current account deficit (CAD) shot up to $10.1 billion (2.1 per cent of GDP) in Q2 of 2014-15 from, $7.8 billion (1.7 per cent of GDP) in the preceding quarter and $5.2 billion (1.2 per cent of GDP) in Q2 a year ago. The rapid worsening in CAD reflects escalating merchandise trade deficit, which could not be brought down due to muted growth in services that also got neutralised by steadily increasing outgo of profit, dividend and interest payment, and more or less stagnant workers’ remittances.

The country, nevertheless, managed to close its overall external transactions with a sizeable addition of $6.9 billion to its forex reserves, thanks to bountiful portfolio investment by picky FIIs. The preceding quarter had seen a much larger addition to reserves of $11.2 billion, but Q2 in 2013-14 had seen $10.4 billion drawdown (due to exceptional circumstances then in external account).

In merchandise trade, POL import was worth $41.9 billion and gold import $7.6 billion, together accounting for over two-fifths of total import bill. Import of these two commodities increased 10 per cent, against 8 per cent increase in total import. Export growth was muted at around 5 per cent. Trade deficit increased 15 per cent over Q2, against sharp reduction during the preceding quarter.

In a worrisome development, the net support from services has been slowing; this support increased by a subdued 3 per cent during Q2; in fact net yield from this source has been ranging between $17-19 billion in recent quarters. Telecommunications, computer, and information services, mirroring the face of Modern India in the global commerce, increased only 2.4 per cent to $17.04 billion. Net income from tourism was marginally lower due to sharper increase in outgo on account of rising foreign jaunts by Indians. Professional and management consulting services netted $1.2 billion. Secondary income, mainly workers’ remittances etc. have stagnated at around $16 billion in recent quarters, whereas repatriation of dividend and profits increased by 9 per cent to $6.9 billion.

In capital flows that funded CAD, portfolio investment brought in $9.8 billion, against $6.6 billion decline in Q2 of 2013-14. Investment in debt securities yielded $10.7 billion, against $5.7 billion drop in this quarter a year ago due to US QE concerns. FDI netted $8 billion (6.9 billion). NRI deposits amounted to $4.1 billion ($8.3 billion). External commercial borrowing broadly remained at $1.3-1.4 billion. Q2 in 2013-14 had seen negative capital flow in addition to CAD, which had led to a sharp decline of $10 billion in forex reserves on BoP account.

Trends in H1
Helped by a sharp improvement during Q1, the first half of the ongoing fiscal recorded a lower CAD of $17.9 billion, against $26.9 billion in H1 of 2013-14. With a relatively better growth in merchandise exports and marginal rise in merchandise imports, the trade deficit narrowed to $73.2 billion, from $83.8 billion in H1 of 2013-14. Lower trade deficit coupled with a marginal rise in net service receipts moderated the CAD to $17.9 billion (1.9 per cent of GDP) from $26.9 billion (3.1 per cent of GDP) a year ago.

Lower CAD and the rise in flows under financial account, particularly portfolio investment that recorded inflow of $22.2 billion, against $6.8 billion outflow, resulted in an accretion of $18.1 billion to the country’s forex reserves, against drawdown of $10.7 billion in comparatively an abnormal H1 of 2013-14. Among the other capital receipts, FDI was $16.2 billion ($14.6 billion), NRI deposits $6.5 billion ($13.7 billion) and ECB $3.4 billion ($2.5 billion). Foreign investment abroad by India Inc was placed at $580 million ($602 million).