Bad News All Around: All time high Current Account Deficit

RBI released numbers on India’s Balance of Payments for Oct – Dec 2012 today (Read: What is Balance of Payments?) and I think the release is  full of bad news.

The headline grabbing number was the record high CAD (Current Account Deficit) which was 6.7% of GDP for the quarter, and a detailed look at the number shows why this is all bad news.

The CAD is simply the difference between exports and imports, and for India this number was a record high $32.6 billion in the quarter. It rose by 61% when compared with the same quarter a year ago.

The thing that caught my eye the most was that Services Exports declined by 2%, and this is the category that contains Software Services Exports which is an important sector for India. This sector is important not only because of the direct export revenue but also because it sends a large number of Indians abroad who then send money back to India in the form of remittances and that will also get impacted, albeit with a time lag. It is also responsible for creating jobs and absorbs a large number of college graduates.

Merchandise exports didn’t do well either, as there was no growth this quarter where there was a growth of 7.6% in the last quarter. If you consider the April – December 2012 9 month time period, then Merchandise Exports actually declined by 5%.

The CAD was financed by the Capital Account, but the break up of that is not looking too bright either.

FDI declined from $5 billion to$2.5 billion. FII investments increased to $8.6 billion from $1.8 billion, but you can’t take too much solace in that because when FIIs pull their money from the market, it crashes violently leaving everyone invested with a lot of pain.

Additionally, banks availed external loans and borrowed $2.7 billion where they had repaid $8.7 billion in the previous time period. Even Net External commercial borrowings (ECBs) rose to $ 3.1 billion against a net repayment of $0.8 billion in Q3 of 2011-12.

Imports surged on account of oil and gold payments, and that’s not likely to come down in the future any time soon either.

I feel quite pessimistic reading these numbers, and I feel that India is headed towards tough times ahead because of bad economic policy where the rest of the world is showing steady recovery and doing much better than us.

2 thoughts on “Bad News All Around: All time high Current Account Deficit”

  1. Only one possible way to overcome this pessimism is a really strong government coming at the centre whenever the next election is held… Sooner the better..

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