Though the CAD widened again in Q1 of 2013-14, it is likely to moderate in Q2, broadly in
line with the narrowing trade deficit. While re-pricing of risk and anticipated dollar liquidity
shortage in view of the Fed’s May 2013 statement on asset purchase tapering led to the
depreciation of the rupee and capital outflows from India in line with other EMDEs, this trend
reversed in early September following additional policy measures and improvements in global
sentiments. Consequently, external sector risks have somewhat receded. However, the window
of opportunity so created needs to be used to bring about further durable adjustment to lower
CAD and encourage its financing through long-term capital inflows, so as to impart greater
resilience to large shocks.
World trade prospects remain weak
III.1 India’s export performance over the last
two years has been affected by continued
sluggishness in global trade and an overvalued
exchange rate for a prolonged period. Judging
by the trends so far, global trade volumes in
2013 are expected to expand at roughly the same
rate as last year, which was the slowest pace in
the last 12 years, except for the contraction in
2009 in the wake of the global financial crisis.
A slowdown in growth in key emerging markets
and developing economies (EMDEs) has further
affected exports from these countries, which
turned negative in Q2 of 2013 (Chart III.1a).
However, there have been divergent trends in
these countries in the recent period (Chart
III.1b), including pick-up in India’s exports in
Q2 of 2013-14 (July-September). The
depreciation in the exchange rate, both in
nominal and real terms, appears to have helped improve India’s export competitiveness in
recent months.
Trade deficit narrowed with pick-up in
exports and fall in imports in Q2 of
2013-14
III.2 Amidst an adverse external environment,
policy interventions helped India to reduce its
trade deficit by about 38.7 per cent in Q2 of
2013-14 (y-o-y basis) (Chart III.2a). This was
on account of both a sharp pick-up in exports
and some moderation in imports.
III.3 Export recoveries were evident in
sectors, such as petroleum products, rice,
readymade garments, marine products and
other chemicals. Moderation in imports was
largely led by a sharp decline in gold and silver
import and a slowdown in imports of machinery,
fertiliser, project goods, coal, vegetable oil and iron and steel. Subsequent to various measures
undertaken by the Reserve Bank and the
government to curb gold imports and a sharp
depreciation in the rupee, gold imports
declined by about 65 per cent in Q2 of 2013-14
(y-o-y) compared to an increase of 80.5 per
cent in Q1 (Chart III.2b and Table III.1).
During Q2, decline in value of gold imports
was on account of both softening of international
gold price and moderation in quantum of gold imports (by about 55 per cent). Accordingly,
the merchandise trade deficit in Q2 of 2013-14
was significantly lower than that in the
corresponding period in the previous year.
Sustained improvements in the trade balance
will, however, require a gradual recovery in
trade partner economies and lower international
prices of key import items (e.g. crude oil) as
well as greater domestic production of
commodities such as coal and iron ore.
Table III.1: Trade deficit narrowed significantly in H1 of 2013-14 reflecting
turnaround in Q2 of 2013-14 |
India’s Merchandise Trade |
(US$ billion) |
Item |
April–March |
April-September |
2011-12 |
2012-13 P |
2012-13 |
2013-14 |
Value |
Growth |
Value |
Growth |
Value |
Growth |
Value |
Growth |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
Exports |
306.0 |
21.8 |
300.4 |
-1.8 |
144.7 |
-6.2 |
152.1 |
5.1 |
Of which: Oil |
56.0 |
35.1 |
60.9 |
8.6 |
27.5 |
-6.2 |
31.2 |
13.5 |
Non-oil |
249.9 |
19.2 |
239.5 |
-4.2 |
117.2 |
-6.2 |
120.9 |
3.2 |
Gold |
6.7 |
10.8 |
6.5 |
-3.2 |
3.3 |
-4.3 |
3.1 |
-6.7 |
Non-Oil Non-Gold |
243.2 |
19.5 |
233.0 |
-4.2 |
113.9 |
-6.3 |
117.8 |
3.5 |
Imports |
489.3 |
32.3 |
490.7 |
0.3 |
236.5 |
-2.9 |
232.2 |
-1.8 |
Of which: Oil |
155.0 |
46.2 |
164.0 |
5.9 |
80.0 |
5.8 |
83.0 |
3.7 |
Non-oil |
334.4 |
26.7 |
326.7 |
-2.3 |
156.5 |
-6.8 |
149.3 |
-4.6 |
Gold |
56.3 |
38.9 |
53.7 |
-4.7 |
20.2 |
-30.2 |
20.4 |
0.6 |
Non-Oil Non-Gold |
278.0 |
24.5 |
273.0 |
-1.8 |
136.3 |
-1.9 |
128.9 |
-5.4 |
Trade Deficit |
-183.4 |
|
-190.3 |
|
-91.8 |
|
-80.1 |
|
Of which: Oil |
-98.9 |
|
-103.2 |
|
-52.5 |
|
-51.8 |
|
Non-oil |
-84.4 |
|
-87.2 |
|
-39.3 |
|
-28.4 |
|
Non-Oil Non-Gold |
-34.8 |
|
-40.0 |
|
-22.4 |
|
-11.1 |
|
Source: DGCI&S. |
Table III.2: CAD widened in Q1 of 2013-14, reflecting a worsening trade deficit |
Major items of India’s balance of payments |
(US $ billion) |
|
2011-12 (PR) |
2012-13 (PR) |
2012-13 |
2013-14 |
Q1 (PR) |
Q4 (PR) |
Q1 (P) |
1 |
2 |
3 |
4 |
5 |
6 |
1. Goods Exports |
309.8 |
306.6 |
75.0 |
84.8 |
73.9 |
of which: Oil |
56.0 |
60.9 |
13.3 |
16.1 |
14.1 |
Gold |
6.7 |
6.5 |
1.6 |
1.8 |
1.5 |
2. Goods Imports |
499.5 |
502.2 |
118.9 |
130.4 |
124.4 |
of which: Oil |
155.0 |
164.0 |
39.4 |
42.2 |
41.1 |
Gold |
56.3 |
53.7 |
9.1 |
15.8 |
16.5 |
3. Trade Balance (1-2) |
-189.7 |
-195.7 |
-43.8 |
-45.6 |
-50.5 |
of which: Non-oil non-gold trade balance |
-41.1 |
-45.4 |
-10.2 |
-5.5 |
-7.7 |
4. Services Exports |
140.9 |
145.7 |
35.8 |
37.8 |
36.5 |
5. Services Imports |
76.9 |
80.8 |
20.8 |
20.9 |
19.7 |
6. Net Services (4-5) |
64.0 |
64.9 |
15.0 |
17.0 |
16.9 |
7. Goods & Services Balances (3+6) |
-125.7 |
-130.7 |
-28.9 |
-28.7 |
-33.6 |
8. Primary Income (Net) |
-16.0 |
-21.5 |
-4.9 |
-5.2 |
-4.8 |
9. Secondary Income (Net) |
63.5 |
64.4 |
16.8 |
15.8 |
16.7 |
10. Net Income (8+9) |
47.5 |
42.9 |
11.9 |
10.6 |
11.9 |
11. Current Account Balance (7+10) |
-78.2 |
-87.8 |
-16.9 |
-18.1 |
-21.8 |
12. Capital and Financial Account Balance |
80.6 |
85.1 |
15.9 |
17.8 |
20.9 |
of which: Change in Reserves |
12.8 |
-3.8 |
-0.5 |
-2.7 |
0.3 |
13. Errors & Omissions -(11+12+13) |
-2.4 |
2.7 |
1.1 |
0.3 |
0.9 |
Memo: As a ratio to GDP |
|
|
|
|
|
14. Trade Balance |
-10.1 |
-10.6 |
-10.2 |
-9.0 |
-11.3 |
15. Net Services |
3.4 |
3.5 |
3.5 |
3.3 |
3.8 |
16. Net Income |
2.5 |
2.3 |
2.8 |
2.1 |
2.6 |
17. Current Account Balance |
-4.2 |
-4.8 |
-4.0 |
-3.6 |
-4.9 |
18. Capital and Financial Account, Net
(Excl. changes in reserves) |
3.6 |
4.8 |
3.8 |
4.0 |
4.6 |
Note: Total of subcomponents may not tally with aggregate due to rounding off.
P: Preliminary. PR: Partially Revised. |
CAD, though widened in Q1 is likely to
moderate in Q2
III.4 India’s current account deficit (CAD)
widened from 3.6 per cent of GDP in Q4 of
2012-13 to 4.9 per cent of GDP in Q1 of 2013-
14 (Table III.2). With some visible improvement
in the trade balance in Q2 of 2013-14, CAD is
likely to show a significant correction in Q2.
FII flows, which had turned negative since
end-May 2013, reversed in September
III.5 Notwithstanding a higher CAD in Q1
of 2013-14, capital inflows were broadly
adequate to finance the current account gap,
requiring only a marginal drawdown of foreign
exchange reserves (Table III.3). While the net
inflows under foreign direct investment (FDI)
increased marginally, a significant rise was evident in NRI deposits over the previous
quarter. Besides, there was a significant
drawdown of assets held by banks under Nostro
balances. Net foreign institutional investment
(FII) flows remained buoyant in the first two
months of Q1. However, amid concerns about
the gradual withdrawal of the quantitative
easing (QE) programme, as indicated by the US
Fed on May 22, 2013, there was re-pricing of
risk and concomitant capital outflows from
EMDEs, including India. Since then, there has
been a net outflow of FII investments of US$
16.6 billion up to September 6, 2013 before
resumption of inflows in subsequent weeks. On
average, there was a net FII outflow of US$ 2.2
billion in each month of Q2 (Table III.4).
III.6 Recognising the risks to capital flows
emanating from global financial conditions, the government and the Reserve Bank
undertook various measures to facilitate capital inflows in the recent period, including (i)
liberalised FDI norms through review of limits
and (or) routes for select sectors viz., telecom,
asset reconstruction companies, credit
information companies, petroleum and natural
gas, courier services, commodity exchanges,
infrastructure companies in the securities
market and power exchanges, (ii) offering a
window for the banks to swap the fresh
FCNR(B) dollar funds with the Reserve Bank,
(iii) increase in the overseas borrowing limit
from 50 to 100 per cent of the unimpaired Tier
I capital of banks (with the option of swap with
the Reserve Bank, and (iv) permission to avail
of ECB under the approval route from their
foreign equity holder company for general
corporate purposes. Since the introduction on
September 10, 2013 of swap facility for
FCNR(B) deposits and bank overseas borrowings, US$ 6.9 billion and US$ 4.4
billion had been received under the respective
schemes until October 25, 2013.
Table III.3: Net capital inflows almost entirely financed CAD in Q1 of 2013-14 |
Disaggregated Items of Financial Account |
(US$ billion) |
|
2011-12 (P) |
2012-13 (PR) |
2012-13 |
2013-14 |
Q1 (PR) |
Q4 (PR) |
Q1 (P) |
1 |
2 |
3 |
4 |
5 |
6 |
1. Direct Investment (net) |
22.1 |
19.8 |
3.8 |
5.7 |
6.5 |
1.a Direct Investment to India |
33 |
26.9 |
5.9 |
7.2 |
6.5 |
1.b Direct Investment by India |
-10.9 |
-7.1 |
-2.1 |
-1.4 |
0 |
2. Portfolio Investment |
16.6 |
26.7 |
-2 |
11.3 |
-0.2 |
2.a Portfolio Investment in India |
16.8 |
27.6 |
-1.7 |
11.5 |
-0.5 |
2.b Portfolio Investment by India |
-0.2 |
-0.9 |
-0.3 |
-0.2 |
0.2 |
3. Financial Derivatives & Employee Stock Options |
- |
-2.3 |
-0.6 |
-0.9 |
-0.5 |
4. Other Investment |
29.2 |
45.2 |
15.4 |
4.2 |
14.1 |
4.a Other equity (ADRs/GDRs) |
0.6 |
0.2 |
0.1 |
0 |
0 |
4.b Currency and deposits |
12.1 |
15.3 |
6.4 |
2.8 |
5.6 |
Deposit-taking corporations, except the central bank: (NRI Deposits) |
11.9 |
14.8 |
6.6 |
2.8 |
5.5 |
4.c Loans* |
16.8 |
10.7 |
3.5 |
-1.6 |
5.9 |
4.c.i Loans to India |
15.7 |
11.1 |
3.5 |
-1.6 |
5.4 |
Deposit-taking corporations, except the central bank |
4.1 |
1.3 |
3.0 |
-6.3 |
4.7 |
General government (External Assistance) |
2.5 |
1.3 |
0.1 |
0.6 |
0.3 |
Other sectors (ECBs) |
9.1 |
8.6 |
0.4 |
4.1 |
0.4 |
4.c.ii Loans by India |
1 |
-0.4 |
0.1 |
0 |
0.4 |
General government (External Assistance) |
-0.2 |
-0.3 |
-0.1 |
-0.1 |
-0.1 |
Other sectors (ECBs) |
1.2 |
-0.1 |
0.1 |
0.1 |
0.5 |
4.d Trade credit and advances |
6.7 |
21.7 |
5.4 |
4.5 |
2.5 |
4.e Other accounts receivable/payable - other |
-6.9 |
-2.7 |
-0.1 |
-1.5 |
0.2 |
5. Reserve assets |
12.8 |
-3.8 |
-0.5 |
-2.7 |
0.3 |
Financial Account (1+2+3+4+5) |
80.7 |
85.4 |
16.1 |
17.6 |
20.1 |
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. |
Table III.4: Portfolio capital outflows increased
during 2013-14 so far |
Trend in capital flows |
(US$ billion) |
Monthly Average |
2012-13 |
2013-14 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Jul-Aug. |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
FDI in India |
2.0 |
3.2 |
1.4 |
2.4 |
2.2 |
2.0 |
FDI by India |
0.7 |
0.5 |
0.7 |
0.5 |
0.0 |
0.3 |
FIIs |
-0.6 |
2.6 |
3.3 |
3.8 |
-0.2 |
-2.2* |
ADRs/GDRs |
0.03 |
0.03 |
0.0 |
0.0 |
0.0 |
0.0 |
ECB |
0.1 |
0.4 |
1.0 |
1.4 |
0.8 |
0.8 |
NRI |
2.2 |
0.9 |
0.9 |
0.9 |
1.8 |
1.2 |
*: July-Sep.
Source: RBI Bulletin, September 2013. |
Table III.5: Exchange rate depreciated in real terms |
Average nominal and real effective exchange rates: trade-based (Base: 2004-05=100) |
|
36-REER |
36-NEER |
6-REER |
6-NEER |
Rs/US$* |
1 |
2 |
3 |
4 |
5 |
6 |
2009-10 |
95.7 |
90.9 |
102.0 |
87.1 |
47.4 |
2010-11 |
103.9 |
93.5 |
114.9 |
91.8 |
45.6 |
2011-12 |
101.4 |
87.4 |
111.5 |
84.4 |
47.9 |
2012-13 |
94.6 |
78.3 |
105.0 |
75.6 |
54.4 |
2013-14 (Oct.18) |
85.8 |
69.8 |
92.6 |
65.9 |
61.6# |
Y-o-Y Variation in 2012-13 over 2011-12 (%) |
-6.7 |
-10.4 |
-5.9 |
-10.5 |
-11.9 |
FY Variation (Oct. 18) over Mar. 2013 (%) |
-9.8 |
-11.3 |
-13.0 |
-13.2 |
-11.7# |
* : end - March. #: Pertains to exchange rate as on October 25, 2013. |
Exchange rate pressures abate after a spell
of sharp depreciation
III.7 Amid heightened volatility in global
and Indian currency markets, the Indian rupee
depreciated speedily by 17.7 per cent against
the US dollar during mid-May to end-August
2013. However, the rupee reversed the trend in
September 2013 and appreciated by 6.0 per cent
and further by 1.9 per cent up to October 25,
2013 as market sentiments improved on the
back of various policy measures announced by
the Reserve Bank and the government and the
Fed’s decision later in the month to maintain
the pace of its QE. The opening of a forex swap
window for the public sector oil marketing
companies played an important role in
stabilising rupee. Earlier, exchange rate
pressures were evident in most EMDEs,
particularly for current account deficit countries
like India, where portfolio flows were severely
affected due to the anticipation of a rollback of
the bond purchase programme by the US Fed
(Chart III.3).
III.8 In terms of the real exchange rate, as
on October 18, 2013, the 6-currency and
36-currency REER showed a depreciation of
13.0 and 9.8 per cent respectively, over March
2013 (Table III.5).
Net international investment position
improves
III.9 Notwithstanding a decline in absolute
terms, India’s external debt as a ratio to GDP
increased in Q1 of 2013-14. Decline in the level
of external debt was mainly attributed to a fall
in rupee denominated debt led by depreciation
in the rupee and outflows from the debt segment
of FIIs. While reserve adequacy indicators
deteriorated further in Q1, India’s reserves
remained adequate to meet exigencies. India’s
net international investment position (IIP) as a
ratio to GDP, improved from (-) 16.8 per cent
at end-March 2013 to (-) 15.9 per cent at end-
June 2013 (Tables III.6 and III.7).
Table III.6: India’s external debt reduced
in Q1 of 2013-14 |
(US$ billion) |
Item |
End-
Mar
2012 (PR) |
End-
Jun
2012 (PR) |
End-
Mar
2013 (PR) |
End-
Jun
2013 (QE) |
Per cent
Variation
(5) over (4) |
1 |
2 |
3 |
4 |
5 |
6 |
1. Multilateral |
50.5 |
49.7 |
51.6 |
51.7 |
0.3 |
2. Bilateral |
26.9 |
27.4 |
25.2 |
24.8 |
-1.5 |
3. IMF |
6.2 |
6.0 |
6.0 |
6.0 |
0.3 |
4. Trade Credit (above 1 year) |
19.1 |
19.2 |
17.9 |
17.5 |
-2.3 |
5. ECBs |
105.1 |
104.5 |
122.7 |
119.4 |
-2.7 |
6. NRI Deposits |
58.6 |
60.9 |
70.8 |
71.1 |
0.4 |
7. Rupee Debt |
1.4 |
1.2 |
1.3 |
1.2 |
-0.7 |
8. Long-term (1 to 7) |
268 |
269 |
295 |
292 |
-1.2 |
9. Short-term |
78.2 |
80.5 |
96.7 |
96.8 |
0.1 |
Total (8+9) |
345.8 |
349.4 |
392.1 |
388.5 |
-0.9 |
PR: Partially Revised. QE: Quick Estimates. |
Table III.7: External sector vulnerability indicators showed a mixed trend |
(Ratios in per cent) |
Indicator |
End-Mar 2012 |
End-Mar 2013 |
End-Jun 2013 |
1 |
2 |
3 |
4 |
1. Ratio of Total Debt to GDP |
19.7 |
21.3 |
22.7 |
2. Ratio of Short-term to Total Debt (Original Maturity) |
22.6 |
24.7 |
24.9 |
3. Ratio of Short-term to Total Debt (Residual Maturity)# |
42.7 |
44.2 |
43.8 |
4. Ratio of Concessional Debt to Total Debt |
13.8 |
11.6 |
11.6 |
5. Ratio of Reserves to Total Debt |
85.1 |
74.5 |
72.7 |
6. Ratio of Short-term Debt to Reserves (Original Maturity) |
26.6 |
33.1 |
34.3 |
7. Ratio of Short-term Debt to Reserves (Residual Maturity)# |
50.1 |
59.0 |
60.2 |
8. Reserves Cover of Imports (in months) |
7.1 |
7.0 |
6.7 |
9. Reserves Cover of Imports and Debt Service Payments (in months) |
6.7 |
6.6 |
6.3 |
10. Debt-Service Ratio (Debt Service Payments to Current Receipts) |
6.0 |
5.9 |
6.2 |
11. External Debt (US$ billion) |
345.8 |
392.1 |
388.5 |
12. Net International Investment Position (IIP) |
-249.8 |
-309.4 |
-296.9 |
13. Net IIP/GDP Ratio |
-13.3 |
-16.8 |
-15.9 |
#: RBI Estimate. |
External risks somewhat declined, but
need to build upon recent gains
III.10 Since 2008-09, in the wake of the global
financial crisis, India’s external sector’s
weakness has come to the fore in several
dimensions. First, CAD widened as a result of
cyclical and structural factors. The CAD/GDP
ratio averaged 3.4 per cent during the five-year
period 2008-09 to 2012-13 after having
averaged just 0.6 per cent in the preceding 16
years after the 1991-92 balance of payment
crisis. Second, there has been a surge in imports
over the last nine years, as a result of which
imports as a ratio of GDP almost doubled to
22.3 per cent from 11.8 per cent during the
preceding 12-year period of 1992-93 to 2003-
04. The exports to GDP ratio also improved, but
roughly at half the pace at which the imports
increased. Improved foreign investment inflows
helped finance the growing trade imbalance, but
capital flow reversals post-Lehman crisis and
again after the tapering indication this year
exposed the growing imbalance making financing of CAD difficult. Consequently, the
rupee came under pressure.
III.11 In face of these pressures, the Reserve
Bank and the government adopted a judicious
approach that encompassed trade, monetary,
fiscal and exchange rate policies to bring about
a macroeconomic adjustment. Consequently,
external sector risks have receded somewhat.
However, uncertainties about future event
shocks remain. It is, therefore, important to
build on the recent gains by aiming at structural
adjustments to further reduce CAD over the
medium-term and encourage its financing
through stable capital inflows.
|