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March quarter current account gap narrows to 3.6% of GDP

27 Jun 2013 Evaluate

Taking markets by surprise, India's Current Account Deficit (CAD) stood at $18.1 billion, or 3.6 % of the GDP in the March quarter, sharply lower from the historically high level of 6.7% seen in the December quarter. However, the current account gap for the full fiscal year ending in March 2013 widened $87.8 billion, which was 4.8% of GDP, compared with $78.2 billion or 4.2% of GDP, a year earlier.

Escalating trade deficit along with significant decline in invisible earnings caused widening of CAD during the year. Decline in invisible earning has essentially been on account of sizeable increase of 21.2 % in investment income payments, and only a modest rise in net services receipts in 2012-13.

Meanwhile, the Balance of Payments (BoP) for the January-March quarter was at $300 million surplus, compared with a $600 million deficit a year earlier. For the fiscal year 2012/13, the balance of payments deficit was $2.7 billion, compared with a surplus of $2.4 billion a year earlier.

Further, the high current account deficit witnessed during 2012-13 and its financing increasing through debt flows particularly by trade credit resulted in significant rise in India’s external debt during 2012-13. However, magnitude of increase in external debt was offset to some extent due to valuation change (gain) resulting from appreciation of US dollar against Indian rupee and other international currencies.

Country’s external debt, as at end-March 2013, was placed at $ 390.0 billion showing an increase of $ 44.6 billion or 12.9% over the level at end-March 2012. The increase in total external debt during financial year 2012-13 was primarily on account of rise in short-term trade credit. Besides, there was sizeable rise in external commercial borrowings (ECBs) and rupee denominated Non-resident Indian deposits as well. However, the share of external commercial borrowings ($ 120.9 billion) continued to be the highest at 31.0 % of total external debt, followed by short term debt (24.8 per cent) and NRI deposits at (18.2 per cent).

Reserve Bank of India (RBI), surprised the markets by bringing out the information a day in advance. With this early release of data, India’s Apex bank apparently is assuaging fears sensed on account of CAD- domestic factor that has played out largely on the Indian currency.

Indian rupee, which has depreciated by more than ten percent since the beginning of this year, striking a record low level of perilous 60.50/$ mark, has thrown the government's fuel subsidy calculations for this year out of whack, raising questions on who will bear the extra burden. Nevertheless, the currency did recoup some ground post the release of this sanguine data.

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