Current account deficit widens to $32.7 b in first half of 2011

Reflecting widening of trade deficit as well as moderation of growth in export of services, India' current account deficit widened to $32.7 billion in the April-September 2011 period, against $29.5 billion in the corresponding year-ago period.

Current account deficit (CAD) occurs when a country's total imports of goods, services and transfers exceed exports. 

Due to a significant increase in international prices of imported commodities — oil, gold and silver — the trade deficit (imports exceed exports) widened to $85.6 billion in the April-September 2011 period, against $69 billion in the corresponding year-ago period.

Though CAD was a shade lower at 3.6 per cent of GDP in the reporting half as compared to 3.7 per cent, economists say this does not lend comfort to policymakers as global demand for exports is falling even as the domestic currency is weakening.

Moreover, the global economic slowdown and the Euro zone crisis, which has triggered a rush towards safe haven investments in US treasuries, does not augur well for the country as India is capital deficit country

“The Government should kick-start growth by undertaking reforms, including on the governance front. For a growing country's like ours, a 2-3 per cent current account deficit is sustainable.

“However, any number above 3 per cent is worrisome,” said the chief economist of a public sector bank.

According to RBI data, CAD in the July-September 2011 period was $16.9 billion, the same as the corresponding period last year.

Financial Account

On account of foreign institutional investment (FII) outflows, the net inflows under the financial account, comprising direct investment, portfolio investment, and other investment, at $17.9 billion in the July-September 2011 period, was lower than the $18.3 billion in the corresponding period last year.

The reporting period saw net portfolio outflows of $1.4 billion as against an inflow of $18.7 billion in the corresponding year-ago period.

With lower equity inflows, there has been a distinct shift towards debt flows which financed a significant part of the CAD during the July-September 2011 period.

Net foreign direct investment to India increased to $4.4 billion in July-September (Q2) 2011, as compared to $3.6 billion in the Q2 of 2010-11.

Net loans taken by banks stood at $3.9 billion in the reporting period, against $3.6 billion in the corresponding year-ago period mainly due to a rise in overseas borrowings.

Net loans taken by the non-government and non-banking sectors stood higher at $6.4 billion against $3.7 billion in Q2 of 2010-11.

Net inflows under short-term trade credit increased marginally to $2.9 billion in the reporting quarter compared to $2.6 billion in Q2 of 2010-11.

The outstanding foreign exchange reserves (including valuation changes) declined by $4.2 billion during the quarter, largely reflecting appreciation of the US dollar against major international currencies.

kram@thehindu.co.in