New RBI data on India’s Balance
of Payments (BoP) for 2017-18 show current account deficit (CAD) at $48.72 bn,
the highest since the record $88.16 bn of 2012-13. With CAD expected to widen
to $75 bn during this fiscal, how vulnerable is the overall BoP position today?
Let’s start with foreign
exchange reserves. Are they sufficient now?
India’s forex reserves, at
$424.55 billion as on March 2018, are actually the eighth largest in the world
(smaller chart right). Also, they can finance 10.9 months of imports, compared
to 7.8 months in March 2014 (just before the Narendra Modigovernment
came to power), 7 months in March 2013 (when there was a mini-BoP crisis, with
the current account deficit hitting a peak), and 2.5 months in March 1991
(which forced the country to seek International Monetary Fund assistance). Any
allusion to a “crisis” from that standpoint is highly misplaced; the RBI’s
current forex war chest is clearly sufficient, both to meet immediate import
needs and to stave off a run on the rupee of the kind that was seen during
May-August 2013.
So, when economists speak of
India’s BoP vulnerabilities, what exactly are they trying to say?
Countries generally accumulate
reserves by exporting more than what they import. IMF data on the current
account balances of the top 10 forex reserves holders reveal all of them —
barring India and Brazil — to have been running surpluses year after year.
India has always had deficits on
its merchandise trade account, with the value of its imports of goods far in
excess of that of exports. At the same time, the country has traditionally
enjoyed a surplus on its ‘invisibles’ account. Invisibles basically cover
receipts from export of software services, inward remittances by migrant
workers, and tourism and — on the other side — payments towards interest,
dividend and royalty on foreign loans, investments and technology/brands, besides
on banking, insurance and shipping services. But with the invisibles surpluses
not exceeding trade deficits — except during the three years from 2001-02 to
2003-04 (bigger chart) — it has resulted in the country consistently
registering CADs.
How then has India been
managing all these years with CADs, and even accumulating reserves?
A country gets foreign exchange
not only from exporting goods and services, but also from capital flows,
whether by way of foreign investment, commercial borrowings or external
assistance. The bigger chart shows that for most years, net capital flows into
India have been more than CADs. The surplus capital flows have, then, gone into
building reserves. The most extreme instance was in 2007-08, when net foreign
capital inflows, at $107.90 billion, vastly exceeded the CAD of $15.74 billion,
leading to reserve accretion of $92.16 billion during a single year. However,
there have also been years, such as 2008-09 and 2011-12, which saw reserves
depletion due to net capital inflows not being adequate to fund even the CAD.
Is this model sustainable? How
long can India continue to import more than it exports, and expect foreign
capital to fully bridge the gap?
India and Brazil represent unique
cases of economies that have built reserves largely on the strength of their
capital rather than current account of the BoP. India is even more unique
because its currency, unlike the Brazilian real, is relatively stable, and not
under frequent speculative attacks. In theory, a country can keep attracting
capital flows to fund CADs so long as its growth prospects are seen to be good,
and the investment environment is equally welcoming. It would help, though, if
such foreign investment also goes towards augmenting the economy’s
manufacturing and services export capacities, as opposed to simply producing or
even importing for the domestic market. In the long run, that can help narrow
the CAD to more sustainable levels.
What is the outlook vis-à-vis
the CAD and capital flows in this fiscal?
The CAD fell sharply from $88.16
billion in 2012-13 to $15.30 billion in 2016-17, mainly because of India’s oil
import bill nearly halving from $164.04 billion to $86.87 billion. However, in
2017-18, the CAD rose to $48.72 billion, courtesy resurgent global crude
prices, and is expected to cross $75 billion this fiscal.
There are signs of capital flows
slowing down as well. Foreign portfolio investors have, since April 1, made
$7.9 billion worth of net sales in Indian equity and debt markets. This is part
of a larger sell-off pattern across emerging market economies, in response to
rising interest rates in the US, and the European Central Bank’s plans to end
its monetary stimulus programme by the end of 2018.
The Swiss investment bank Credit
Suisse has forecast net capital flows to India for 2018-19 at $55 billion,
which will be lower than the projected CAD of $75 billion. In the event, forex
reserves may decline for the first time since 2011-12. The RBI’s data already
show the total official reserves as on June 8 at $413.11 billion, a dip of $
11.43 billion over the level of end-March 2018.
Credit: Indian Express Explained (https://indianexpress.com/article/explained/assessing-the-balance-of-payments-position-5222914/)
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