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India’s CAD is within striking distance of moving into a surplus

India’s current account is within striking distance of moving into a surplus . But don’t uncork the bubbly yet. Here’s why.

What does balance of payments (BoP) mean for an economy?

An economy, similar to an organisation, has earnings and spending. The balance of payments (BoP) is a statement of account foreign exchange earned and spent.

What are current account and capital accounts in BoP?

The BoP statement is classified under two broad heads—the current account and capital account. Funds through routes such as the foreign direct investment (FDI) are shown the capital account as these stream in over a period of time.

There are also spending and earnings that are “current” in nature. These include export earnings, import payments, foreign exchange flows from intangible services exports (such as tourism), and NRI remittances or money transferred by non-residents to relatives back home, among others. These are clubbed under the current account.

What does a deficit or a surplus in the current account signify?

A current account deficit (CAD) means that there is more outflow of capital from the economy than inflow, which is not desirable. A surplus would mean that the economy is selling more to the rest of the world than what it is buying.

What does the latest data on CAD show?

Reserve Bank of India (RBI) data on Wednesday showed India posted a current account deficit of USD 300 million, or 0.1 per cent of gross domestic product (GDP), during April-June 2016. While the deficit was much lower than USD 6.1 billion or 1.2 per cent of GDP in the same quarter of the previous year, most analysts were expecting India’s CAD to turn positive for the first time since January-March 2007.

Is it a good or a bad sign?

Seen in isolation, for a net importing country such as India, a low CAD is a good sign. That said, there are a few devils in the detail.

What are the specific worrisome markers?

Remittances, a broad measure of the funds that NRIs transfer to families back, have weakened considerably. Private transfer receipts, a gauge for overseas remittances, fell to USD 14.6 billion in April-June from USD 16.5 billion a year ago.

Why have remittances slowed down?

Persistently, low oil prices have affected overseas workers’ income. About half of India’s USD 70 billion-odd NRI remittances originate from the Gulf countries, the region worst affected by record-low crude oil prices and subdued global economic activity. The resultant cutback in salaries and wages have left fewer dollars available with Indian workers in the Middle-east to send back home. Private transfer receipts, which reflect remittances, fell 12 percent to USD 14.6 billion in April-June versus USD 16.5 billion a year ago, according to the RBI data.

This reflects a peculiar flux. Plunging oil prices have helped India contain the import bill–the goods trade deficit narrowed due to an 11.5 percent decline in imports. But, it has also shaved off remittance inflows significantly.

What are the other concern areas?

Apart from weakening remittances, services exports are also weighing in on CAD. Net services receipts fell 11 percent to USD 15.8 billion during April-June 2016 from USD 17.8 billion a year ago, pulled down by muted travel, financial services and other business services exports, partly mirroring weak external growth outlook.

What about capital inflows?

Net capital inflows rose to USD 7.1 billion, nearly double from a year-ago. Portfolio flows, on a net basis, were strong growing to USD 21 billion a (-)USD 50 million a year ago. Foreign direct investment (FDI), viewed as a better investment source qualitatively because of its stickiness, disappointed. Net FDI flows eased to USD 4.1 billion during April-June 2016 from USD 10 billion a year ago.

What are the other worrying undertones?

CAD has narrowed down, in the current context, primarily by weak imports rather than growing exports. This could be emblematic of muted investment demand, and also signs that real investment is still moving on a slower lane despite the overall bullish commentary about the Indian economy’s prospects.