With recovery in export growth in the second half and revival in capital inflows, the external
sector of the economy improved during 2009-10. The current account deficit, however,
widened to 2.9 per cent of GDP, primarily due to lower surplus in the invisibles account.
Through better absorption of foreign capital, the higher current account deficit contributed
to the recovery in growth. Gross external debt and net international liabilities of the country
increased during the year. The debt sustainability indicators, however, continued to remain
comfortable. As on July 16, 2010, the foreign exchange reserves stood at US$ 281.9 billion.
International Developments
III.1 The global economy witnessed a
robust recovery in the first quarter of 2010
before encountering heightened downside
risks stemming from concerns relating to
sovereign debt sustainability in several
European countries. The uncertainty about
the fiscal stress spreading from the
“periphery” countries to the “core” in the
euro area and even to other advanced
economies led to significant erosion in risk
appetite which was reflected in flight to
safety, greater volatility in markets, and
tighter financing conditions.
III.2 Taking into account the strong 5.1
per cent growth in global output in the first
quarter of 2010, in July 2010, the IMF
revised its growth projections upwards for
2010 to 4.6 per cent from 4.2 per cent earlier
(Chart III.1a). The pace and the drivers of
growth are expected to remain divergent
across countries. The emerging and
developing economies are projected to
grow by 6.8 per cent, led by China and
India, as against 2.6 per cent growth
projected for advanced economies. In the
euro area, the impact of tighter financing
conditions on growth is expected to be
significantly offset by the positive effects
of euro depreciation.
III.3 The advanced economies, which
exhibited both year-on-year and sequential
quarter-on-quarter recovery in the first
quarter of 2010, face the major downside
risk in the form of pressures from the
markets to reverse fiscal expansion
(Chart III.1b and c). Recovery in industrial
production, however, continues (Chart III.1d).
The global composite Purchasing
Managers’ Index (PMI) moderated
somewhat in May and June 2010 as
compared to its 34-month high level in
April 2010, though it remained higher than
its average level in 2009.
III.4 The improving demand conditions
have helped in the recovery of world trade,
which grew by about 25 per cent in value
terms, on a year-on-year basis, during the
first quarter of 2010. According to the IMF,
exports of emerging and developing
economies have witnessed higher growth
than those of advanced economies in recent
months. Despite the high growth, the global
export performance is yet to reach its
pre-crisis level. In fact, world exports
declined by 3.0 per cent, on a quarter-onquarter
basis (Chart III.1e). For the year as
a whole, the IMF projects world trade (in
goods and services) to grow by 9 per cent
as against 11.3 per cent decline in 2009.
III.5 In a recent joint report on G-20
trade and investment measures, the WTO,
OECD and UNCTAD noted the importance
of trade and investment to firmly anchor
the economic recovery. Several countries
continue to impose new trade restrictions,
though there has been a decline in the
number of new measures. According to the
WTO, the new import restricting measures
introduced during November 2009-May
2010 (along with new initiations of
investigations into the imposition of trade
remedy measures) cover close to 0.4 per
cent of annual world imports as compared
with 1.0 per cent during October 2008-
October 2009. There has also been an
increase in export restrictions worldwide in
the form of introduction of new export
duties, prohibitions, and export quotas.
Economic conditions around the world, in
particular persistent high levels of
unemployment and mounting pressure on
government finances, may continue to feed
protectionist pressures. Unemployment
rates in advanced economies remain high
though there is evidence of stabilisation/
some decline in recent months (Chart III.1f).
High fiscal stress levels of advanced
economies is a potential risk to the global
economy. If fiscal austerity is implemented
to restore market normalcy, it could impede
recovery. On the other hand, if the fiscal
stress is allowed to continue to avoid
weakening of recovery, adverse market
response could add further volatility
(Chart III.1g and h).
III.6 According to the IMF, capital flows
to EMEs could initially decline because of
waning risk appetite of global investors. The World Bank’s recent assessment also
suggests that capital inflows to developing
countries could moderate on the back of
increased competition for global savings
from a five-fold increase in public sector
financial requirements in high income
countries. Because of higher growth
prospects, lower public debt and monetary
exit ahead of advanced economies, EMEs
will, however, attract larger capital inflow
in the later part of the year, which in turn
could exert pressures on exchange rate and
asset prices.
III.7 The external environment, thus,
suggests that India’s import growth could
exceed its export growth because of the
asymmetry in the speed of GDP growth
between India and the global economy. As
a result, possible widening of current
account deficit may also require higher net
inflows of foreign capital, which could
remain volatile in a global market where
risk appetite of investors may take some
time to recover.
Merchandise Trade
Exports
III.8 India’s exports, which contracted
sharply in the wake of the crisis, have
exhibited positive growth since October
2009 (Chart III.2).
Imports
III.9 Imports too, which were hit by the
crisis, have recovered sharply with high
positive growth since November 2009. For
the full year 2009-10, however, there was
a net decline in imports. Oil and non-oil imports registered a decline of 7.0 per cent
and 4.9 per cent, respectively, during
2009-10 (Chart III.3 and Table III.1).
III.10 The overall merchandise trade
deficit during 2009-10 was at US$ 108
billion, down from US$ 118 billion in
2008-09, due to relatively larger decline in
imports than exports during the year
(Table III.1). In the first quarter of 2010-11,
import growth, however, has exceeded
export growth.
Balance of Payments (BoP)
Current Account
III.11 The deficit in the current account
expanded to 2.9 per cent of GDP in 2009-10
from 2.4 per cent of GDP in 2008-09. In
absolute terms, current account deficit
rose in both quarters of the second half
of 2009-10 over the quarters in the first
half of the year, which coincided with
stronger domestic recovery in growth, ahead of the global recovery (Table III.2).
The merchandise trade deficit in 2009-10
at US$ 117.3 billion was similar to US$
118.7 billion in 2008-09. As percentage
of GDP, however, the trade deficit was lower at 8.9 per cent in 2009-10 as
compared with 9.8 per cent in 2008-09.
The wider deficit in the current account,
thus, resulted from lower surplus in the
invisibles account.
Table III.1: India’s Merchandise Trade |
Item |
April-March |
April-May |
2009-10 P |
2009-10 R |
2010-11 P |
Absolute (US$ billion) |
Growth (%) |
Absolute (US$ billion) |
Growth (%) |
Absolute (US$ billion) |
Growth (%) |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
Exports |
178.7 |
-3.6 |
24.8 |
-33.3 |
33.0 |
33.2 |
Oil |
28.1 |
2.1 |
3.0 |
-45.9 |
.. |
.. |
Non-oil |
150.5 |
-4.6 |
21.8 |
-31.0 |
.. |
.. |
Imports |
286.8 |
-5.6 |
39.2 |
-34.3 |
54.7 |
39.5 |
Oil |
87.1 |
-7.0 |
10.0 |
-48.3 |
16.9 |
68.5 |
Non-oil |
199.7 |
-4.9 |
29.2 |
-27.6 |
37.8 |
29.6 |
Trade Balance |
-108.2 |
-8.6 |
-14.4 |
-36.1 |
-21.7 |
50.3 |
Non-Oil Trade Balance |
-49.2 |
-5.9 |
-7.4 |
-15.3 |
.. |
.. |
R: Revised. P: Provisional. .. Not Available.
Source: DGCI&S. |
Table III.2: India's Balance of Payments |
(US$ billion) |
|
2008-09 |
2009-10 |
2008-09 |
2009-10 |
Apr-Mar |
Apr-Mar |
Jan-Mar |
Apr-Jun |
Jul-Sep |
Oct-Dec |
Jan-Mar |
PR |
P |
PR |
PR |
PR |
PR |
P |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
1. |
Exports |
189.0 |
182.2 |
38.5 |
39.2 |
43.5 |
47.1 |
52.4 |
2. |
Imports |
307.7 |
299.5 |
58.7 |
64.8 |
72.6 |
78.1 |
83.9 |
3. |
Trade Balance (1-2) |
-118.7 |
-117.3 |
-20.2 |
-25.6 |
-29.1 |
-31.1 |
-31.5 |
4. |
Net Invisibles |
89.9 |
78.9 |
19.0 |
21.2 |
20.4 |
18.9 |
18.5 |
5. |
Current Account Balance (3+4) |
-28.7 |
-38.4 |
-1.2 |
-4.5 |
-8.8 |
-12.2 |
-13.0 |
6. |
Gross Capital Inflows |
312.4 |
344.0 |
59.4 |
77.1 |
95.4 |
81.3 |
90.2 |
7. |
Gross Capital Outflows |
305.2 |
290.4 |
58.0 |
73.1 |
76.6 |
66.6 |
74.1 |
8. |
Net Capital Account (6-7) |
7.2 |
53.6 |
1.4 |
4.0 |
18.8 |
14.7 |
16.1 |
9. |
Overall Balance (5+8)# |
-20.1 |
13.4 |
0.3 |
0.1 |
9.4 |
1.8 |
2.1 |
Memo: |
i. |
Export growth (%) |
13.7 |
-3.6 |
-20.0 |
-31.8 |
-18.9 |
19.3 |
36.2 |
ii. |
Import growth (%) |
19.4 |
-2.7 |
-20.8 |
-21.7 |
-21.7 |
6.3 |
43.0 |
iii. |
Trade balance (as a % of GDP) |
-9.8 |
-8.9 |
|
|
|
|
|
iv. |
Net invisibles growth (%) |
18.7 |
-12.2 |
-15.8 |
-3.7 |
-23.3 |
-15.6 |
-2.6 |
v. |
CAD as a % of GDP |
2.4 |
2.9 |
|
|
|
|
|
vi. |
Foreign Exchange Reserves (as at end of the period) |
252.0 |
279.1 |
252.0 |
265.1 |
281.3 |
283.5 |
279.1 |
P: Preliminary. PR: Partially Revised. #: Includes errors and omissions. CAD: Current Account Deficit. |
Invisibles
III.12 Invisibles surplus was lower at
US$ 79 billion in 2009-10 (6.0 per cent of
GDP) from US$ 90 billion in 2008-09,
mainly due to decline in receipts under
transportation, business, financial and
communication services coupled with
significant increase in payments of
miscellaneous services such as business and
financial services (Table III.3). During
2009-10, invisibles surplus financed 67.3
per cent of the trade deficit as against 75.8
per cent during 2008-09.
Capital Account
III.13 The surplus in the capital account
increased during the fourth quarter of
2009-10 mainly due to large inflows under portfolio investments and short-term trade
credits. However, net external commercial
borrowings (ECBs) remained low, mainly
due to increased repayments of commercial
loans. Inflows under foreign direct
investment witnessed some moderation.
Banking capital registered net outflows on
account of build-up of assets abroad by
banks coupled with net outflows under NRI
deposits. For the year as a whole, net capital
flows were significantly higher (4.1 per cent
of GDP) as compared with the previous year
(0.6 per cent of GDP), mainly due to large
inflows under FDI, portfolio investments and
short-term trade credits (Table III.4 and
Chart III.4).
Table III.3: Invisibles Gross Receipts and Payments |
(US$ billion) |
Item |
Invisibles Receipts |
Invisibles Receipts |
April-March |
Jan-March |
April-March |
Jan-March |
2008-09 |
2009-10 |
2008-09 |
2009-10 |
2008-09 |
2009-10 |
2008-09 |
2009-10 |
PR |
P |
PR |
P |
PR |
P |
PR |
P |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
1. Travel |
10.9 |
11.9 |
2.7 |
3.4 |
9.4 |
9.3 |
2.6 |
2.6 |
2. Transportation |
11.3 |
11.1 |
2.9 |
3.1 |
12.8 |
11.9 |
2.5 |
3.6 |
3. Insurance |
1.4 |
1.6 |
0.3 |
0.4 |
1.1 |
1.3 |
0.3 |
0.3 |
4. Govt. not included elsewhere |
0.4 |
0.4 |
0.1 |
0.1 |
0.8 |
0.5 |
0.4 |
0.2 |
5. Miscellaneous |
77.7 |
68.7 |
17.7 |
19.9 |
27.9 |
36.5 |
7.3 |
12.2 |
Of which: |
|
|
|
|
|
|
|
|
Software |
46.3 |
49.7 |
10.8 |
14.3 |
2.8 |
1.5 |
0.5 |
0.3 |
Non-Software |
31.4 |
19.0 |
6.9 |
5.6 |
25.1 |
35.0 |
6.8 |
11.9 |
6. Transfers |
47.5 |
54.4 |
10.0 |
13.2 |
2.7 |
2.3 |
0.4 |
0.6 |
Of which |
|
|
|
|
|
|
|
|
Private Transfers |
46.9 |
53.9 |
9.8 |
13.1 |
2.3 |
1.8 |
0.3 |
0.5 |
7. Income |
14.3 |
13.0 |
3.4 |
2.7 |
18.8 |
20.4 |
4.6 |
4.8 |
Investment Income |
13.5 |
12.1 |
3.2 |
2.5 |
17.5 |
18.7 |
4.3 |
4.3 |
Compensation of Employees |
0.8 |
0.9 |
0.2 |
0.2 |
1.3 |
1.7 |
0.3 |
0.5 |
Total (1 to 7) |
163.5 |
161.2 |
37.1 |
42.8 |
73.6 |
82.3 |
18.1 |
24.4 |
P: Preliminary. PR: Partially Revised. |
III.14 Available information during 2010-11
so far shows some moderation in capital inflows (Table III.5). There has been a
perceptible slowdown in net FII inflows and
inflows under NRI deposits, but FDI to
India remains stable reflecting the
confidence of global investors in India’s
growth prospects.
Table III.4: Net Capital Flows |
(US$ billion) |
|
2008-09 |
2009-10 |
2009-10 |
Apr-Mar |
Apr-Mar |
Apr-Jun |
Jul-Sep |
Oct-Dec |
Jan-Mar |
PR |
P |
PR |
P |
PR |
P |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
1. Foreign Direct Investment (FDI) |
17.5 |
19.7 |
6.1 |
6.5 |
3.9 |
3.2 |
Inward |
35.0 |
31.7 |
8.7 |
10.7 |
7.1 |
5.1 |
Outward |
17.5 |
12.0 |
2.6 |
4.2 |
3.2 |
1.9 |
2. Portfolio Investment |
-14.0 |
32.4 |
8.3 |
9.7 |
5.7 |
8.8 |
Of which: |
|
|
|
|
|
|
FIIs |
-15.0 |
29.0 |
8.2 |
7.0 |
5.3 |
8.5 |
ADR/GDRs |
1.2 |
3.3 |
0.0 |
2.7 |
0.5 |
0.1 |
3. External Assistance |
2.6 |
2.0 |
0.1 |
0.5 |
0.6 |
0.8 |
4. External Commercial Borrowings |
7.9 |
2.5 |
-0.5 |
1.2 |
1.7 |
0.1 |
5. NRI Deposits |
4.3 |
2.9 |
1.8 |
1.0 |
0.6 |
-0.6 |
6. Banking Capital excluding |
|
|
|
|
|
|
NRI Deposits |
-7.5 |
-0.8 |
-5.2 |
3.3 |
1.3 |
-0.4 |
7. Short-term Trade Credits |
-1.9 |
7.7 |
-1.5 |
0.8 |
3.3 |
5.0 |
8. Rupee Debt Service |
-0.1 |
-0.1 |
– |
– |
– |
-0.1 |
9. Other Capital |
-1.5 |
-12.7 |
-5.2 |
-4.3 |
-2.4 |
-0.9 |
Total (1 to 9) |
7.2 |
53.6 |
4.0 |
18.8 |
14.7 |
16.1 |
P: Preliminary. PR: Partially Revised. – : Negligible. |
Table III.5: Recent Trends in Capital Flows |
(US$ billion) |
Component |
Period |
2009-10 |
2010-11 |
1 |
2 |
3 |
4 |
FDI to India |
April-May |
4.4 |
4.4 |
FIIs (net) |
April - July 16 |
8.7 |
6.2 |
ADRs/GDRs |
April-June |
0.04 |
1.0 |
ECB Approvals |
April-June |
2.7 |
5.3 |
NRI Deposits (net) |
April-June |
1.8 |
1.3 |
FDI : Foreign Direct Investment.
FII : Foreign Institutional Investors.
ECB : External Commercial Borrowings.
NRI : Non Resident Indians.
ADR : American Depository Receipts.
GDR : Global Depository Receipts. |
III.15 Notwithstanding some depreciation
of the rupee against the US dollar in the
first quarter of 2010-11 due to volatile
portfolio flows, the appreciation of the real effective exchange rate continued,
reflecting high inflation differentials
between India and its trading partners
(Chart III.5 and Table III.6).
Foreign Exchange Reserves
III.16 During the year 2009-10, India’s
foreign exchange reserves, on a BoP basis
(i.e., excluding valuation effects), increased by US$ 13.4 billion as against a decline of
US$ 20.1 billion during the previous year.
The valuation gain, which reflects the
depreciation of the US dollar against major
international currencies, was about US$
13.6 billion during 2009-10 as compared
to a valuation loss of US$ 37.7 billion
recorded during the previous year.
Accordingly, the valuation gains alone
accounted for about 50.4 per cent of the
increase in the reserves during 2009-10.
Including the valuation effects, India’s
foreign exchange reserves increased by
US$ 27.1 billion during 2009-10 to reach
the level of US$ 279.1 billion as at end-March
2010 (Table III.7 and Chart III.6). India’s
foreign exchange reserves stood at US$
281.9 billion as on July 16, 2010.
Table III.6: Nominal and Real Effective Exchange Rates of the Indian Rupee (Trade Based Weights, Base : 1993-94 = 100) |
|
Index
June
2010 P |
(Per cent, appreciation + /depreciation -) |
2008-09 |
2009-10 P |
2009-10 (Apr-Jun) P |
2010-11
(Apr- Jun) P |
1 |
2 |
3 |
4 |
5 |
6 |
36-REER |
101.2 ^ |
-13.6 |
13.3 |
1.7 # |
1.4 # |
36-NEER |
89.6 ^ |
-10.3 |
9.3 |
4.6 # |
1.5 # |
6-REER |
118.3 |
-14.0 |
20.0 |
5.8 |
3.3 |
6-NEER |
67.6 |
-14.8 |
10.2 |
3.5 |
1.4 |
Rs/USD |
47.1 @ |
-21.5 |
12.9 |
5.2 * |
-4.2 * |
NEER : Nominal Effective Exchange Rate.
REER : Real Effective Exchange Rate.
P: Provisional.
#: April-May. ^: May 2010. *: Up to July 20.
@: Rupee-US dollar exchange rate as on July 20, 2010
Note: Rise in indices indicates appreciation of the rupee and vice versa. |
Table III.7: Foreign Exchange Reserves |
(US$ million) |
Month (End Period) |
Gold |
SDR |
Foreign Currency Assets |
Reserve Position in the IMF |
Total (2+3+4+5) |
1 |
2 |
3 |
4 |
5 |
6 |
March 2009 |
9,577 |
1 |
241,426 |
981 |
251,985 |
March 2010 |
17,986 |
5,006 |
254,685 |
1,380 |
279,057 |
July 16, 2010 |
19,894 |
4,987 |
255,677 |
1,343 |
281,901 |
External Debt
III.17 As at end March 2010, India’s
external debt stock stood at US$ 261.4
billion, an increase of US$ 36.9 billion over its level at end-March 2009. The increase
was mainly on account of increase in longterm
debt, such as external commercial
borrowings, NRI deposits and SDR related
liabilities (Table III.8). Of the total increase
in India’s external debt, the valuation effect
on account of depreciation of the US dollar
against major international currencies
accounted for 17.8 per cent. Further, shortterm
debt was US$ 52.5 billion on original
maturity basis and was US$ 107.6 billion
on residual maturity basis. In terms of
currency composition, the US dollar
denominated debt accounted for 58.2 per cent
of India’s total external debt at end-March
2010. Key debt sustainability indicators
suggest that India’s external debt remain at
comfortable level.
Table III.8: India's External Debt |
(US$ billion) |
Item |
End-March
2008 |
End-March
2009 PR |
End-March
2010 P |
Variation
(March 2010 over
March 2009) |
Amount |
Per cent |
1 |
2 |
3 |
4 |
5 |
6 |
1. Multilateral |
39.5 |
39.5 |
42.7 |
3.2 |
8.1 |
2. Bilateral |
19.7 |
20.6 |
22.6 |
2.0 |
9.6 |
3. International Monetary Fund |
1.1 |
1.0 |
6.0 |
5.0 |
493.4 |
4. Trade Credit (above 1 year) |
10.3 |
14.5 |
16.9 |
2.4 |
16.5 |
5. External Commercial Borrowings |
62.3 |
62.4 |
71.0 |
8.6 |
13.7 |
6. NRI Deposit |
43.7 |
41.6 |
48.1 |
6.5 |
15.7 |
7. Rupee Debt |
2.0 |
1.5 |
1.6 |
0.1 |
8.5 |
8. Long-term (1 to 7) |
178.7 |
181.2 |
209.0 |
27.8 |
15.4 |
9. Short-term |
45.7 |
43.4 |
52.5 |
9.1 |
21.0 |
Total (8+9) |
224.4 |
224.5 |
261.4 |
36.9 |
16.5 |
(per cent) |
Total Debt /GDP |
18.1 |
20.5 |
18.9 |
|
|
Short-term Debt/Total Debt |
20.4 |
19.3 |
20.1 |
|
|
Short-term Debt/Reserves |
14.8 |
17.2 |
18.8 |
|
|
Concessional Debt/Total Debt |
19.7 |
18.7 |
16.8 |
|
|
Reserves/Total Debt |
138.0 |
112.2 |
106.7 |
|
|
Debt Service Ratio |
4.8 |
4.6 |
5.5 |
|
|
P: Provisional. PR: Partially Revised. |
International Investment Position
III.18 India’s net international liabilities
increased by US$ 34.5 billion during the
fourth quarter of 2009-10 mainly due to
increase in net inflows under portfolio and
foreign direct investment to India. Total
external financial assets decreased
marginally by US$ 1.8 billion to US$ 378.8
billion as at end-March 2010 over the
previous quarter due to decline in reserve
assets. The reserve assets declined by US$
4.4 billion due to the valuation loss of US$
6.6 billion, owing to the appreciation of the
US dollar against major international
currencies during the quarter. Total
international financial liabilities increased
by US$ 32.8 billion over the previous
quarter to US$ 536.5 billion as at end-
March 2010 mainly on account of increase
in inflows under both portfolio investment
and foreign direct investment (Chart III.7).
III.19 Overall, the external sector
developments during 2009-10 suggest
higher absorption of foreign capital through
a higher current account deficit, a factor that contributed to the recovery. Trends in
capital inflows during 2010-11 so far
suggest some moderation, while import
growth has remained ahead of export
growth, reflecting stronger growth in India
relative to the global recovery. The nearterm
external sector outlook could be
conditioned by the impact of expected
higher import growth relative to exports on
the current account deficit and its financing
through the capital account in an
environment of expected moderation in the
capital flows to EMEs.
|