The balance of payments (BoP) data for the third quarter was released by Reserve Bank of India on March 31. The figures point to certain risk factors in India's external account, while also raising issues of data transparency in certain areas.

Despite the improvement in net invisibles surplus, the current account deficit widened during April-December 2010 to $38.9 billion ($25.5 billion a year ago) mainly due to a higher trade deficit. At this level, the CAD works out to 3.1 per cent of GDP during April-December 2010. Despite a significant increase in net capital inflows, accretion to reserves was marginally lower in April-December 2010, compared with the like period in 2009.

DOWNSIDE RISKS

Against the backdrop of these the BoP developments, the downside risks to India's external sector are: (a) higher current account deficit, (b) large debt component of capital flows, (c) higher component of short-term credit as part of debt capital (d) deceleration in inward foreign direct investment (FDI) and (e) higher flows under FII.

First, higher current account deficit could be a concern in the event of uncertainty in international crude oil prices. The financing of the same is not a problem in the immediate future, but could be a concern in view of the deceleration in FDI flows and uncertainty attached to FII flows.

Second, as is evident from the press release, the debt component of capital flows has increased in terms of external commercial borrowings, NRI deposits and short-term credit. A part of FII inflows is also invested in debt.

Third, a large component of short-term credit in the capital flows is a downside risk. Together with ECB, NRI deposit, the residual maturity in the shorter end (less than one year) could be a concern in the medium term.

Fourth, the deceleration of inward FDI could pose a risk in terms of financing a higher current account deficit. Continuation of this trend will be a concern from a medium-term perspective.

Fifth, higher flows under FIIs were helpful in financing the large current account deficit. But the FII flows are speculative in nature and are regarded as ‘hot money'. Whether our external sector should depend more on FII flows or FDI flows to finance the current account is a policy issue.

DATA TRANSPARENCY

BoP data are released by RBI on quarterly basis with a lag of one quarter in financial year terms. Over the years, the transparency in data dissemination has been enhanced. But it has been observed that, contrary to the earlier practice, the central bank puts out a press release without explaining all the data developments. Later, as a research article, it publishes a detailed version. This renders the press release incomplete. There are at least three such discrepancies.

First, the discrepancy between import and export data published by the Ministry of Commerce (Customs data) and RBI (banking channel data) are not reconciled. For example, April-December imports are higher in the case of RBI than Customs by $28 billion. The evidence suggests that Customs data are subject to very frequent revisions. It is important that, like the RBI, the Ministry should have a revision policy. This is important for the sake of credibility.

The same holds true for export data, where the difference is about $10 billion. Conventional wisdom suggests that in the case of imports the difference is on account of defence imports and, in case of exports, it is on account of timing, coverage and valuation. But it is important that persistent and large differences are explained in the press release and an attempt made to reconcile these data.

Second, the “Other Capital” item in net capital flows as recorded in the press release amounted to a net outflow of $12.7 billion. This nearly accounted for 40 per cent of the total net capital flows. The RBI press release should have explained such net outflows.

Third, the RBI press release should have been more comprehensive with regard to items under invisibles, such as non-software services and investment income details.

The RBI, being the sole data provider on BoP, has taken a conscious decision not to provide detailed data in the press release, but instead publish the same in the RBI Bulletin in an article form, with a time lag. The reasons for this are best known to the central bank.

The RBI may consider improving its coverage of the three items, so that its press release is self-explanatory.

(The author is Professor of Economics at K.J. Somaiya Institute of Management Studies and Research, Mumbai.)

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