BALANCE OF PAYMENT

Shrinking foreign trade

INDIAs trade deficit during the first nine months of fiscal 2009-10 on a balance of payments (BoP) basis was lower at US$ 89.51 bn compared with US$ 98.44 bn during the same period in fiscal 2008-09. The trade deficit on a BoP basis in Q3 (US$ 30.72 billion) was, however, less than that in Q3 of 2008-09 (US$ 34.04 billion). This is revealed in e report (India's Balance of Payments Developments during the first quarter (October-December) of 2009-10) of the countrys central banking authority Reserve Bank of India (RBI). The key features of Indias BoP that emerged in Q3 of fiscal 2009 -10 were:(i) Exports recorded a growth of 13.2 per cent during Q3 of 2009-10 over the corresponding quarter of the previous year, after consecutive declines in the last four quarters.(ii) Imports registered a growth of 2.6 per cent in Q3 of 2009-10 after recording consecutive declines in the last three quarters.(iii) Private transfer receipts remained robust during Q3 of 2009-10.(iv) Despite low trade deficit, the current account deficit was higher at US$ 12.0 billion during Q3 of 2009-10 mainly due to lower invisibles surplus.(v) The current account deficit during April-December 2009 was higher at US$ 30.3 billion as compared to US$ 27.5 billion during April-December 2008.(vi) Surplus in capital account increased sharply to US$ 43.2 billion during April-December 2009 (US$ 5.8 billion during April-December 2008) mainly on account of large inflows under FDI, Portfolio investment, NRI deposits and commercial loans.(vii) As the surplus in capital account exceeded the current account deficit, there was a net accretion to foreign exchange reserves of US$ 11.3 billion during April-December 2009 (as against a drawdown of US$ 20.4 billion during April-December 2008).

Major Items of India's Balance of Payments (US$ million)

(2007-08) (PR) Exports Imports Trade Balance Invisibles, net Current Account Balance Capital Account* 166163 257789 -91626 74592 -17034 109198 (2008-09) (P) 175184 294587 -119403 89587 -29817 9737 April-December (2008-09) (PR) 150520 248967 -98446 70931 -27516 7136 April-December (2009-10) (P) 124473 213988 -89515 59185 -30330 41630

Change in Reserves# (+ indicates -92164 increase;- indicates decrease)

20080

20380

-11330

Including errors & omissions; # On BoP basis excluding valuation; P: Preliminary, PR: Partially revised. R: revised SOURCE: Reserve Bank of India Report

Invisibles

The decline in invisibles receipts, which started in the Q4 of 2008-09, continued during Q3 of 2009-10. Invisibles receipts registered a decline of 3.1 per cent during the quarter (as against an increase of 5.4 per cent in Q3 of 2008-09) mainly on account of decline in business, communication and financial services, and investment income receipts. Although, software exports recorded a robust growth of 15.3 per cent, services exports as a whole witnessed a decline of 12.3 per cent during the quarter as against an increase of 11.8 per cent during the corresponding quarter of 2008-09. Invisible receipts recorded a decline of 7.7 per cent during April-December 2009, as compared with an increase of 22.2 per cent in the corresponding period of the previous year, mainly due to the lower receipts under almost all components of services coupled with lower investment income receipts. Invisibles Payments Invisibles payments recorded a growth of 12.9 per cent during Q3 of 2009-10, as compared with a low growth of 2.4 per cent in Q3 of 2008-09, mainly led by increase in payments under almost all components of services. Invisibles payments witnessed a positive growth of 3.7 per cent in April-December 2009 (10.4 per cent in April-December 2008) mainly supported by higher business, communication and financial services, and increase in payments under investment income account. Invisibles Balance Size of invisibles surplus in Q3 of 2009-10 was, however, lower than Q3 of preceding year. Therefore, despite low trade deficit, the current account deficit was higher at US$ 12.0 billion in Q3 of 2009-10 (US$ 11.7 billion in Q3 of 2008-09). Net invisibles (invisibles receipts minus invisibles payments) stood at US$ 59.2 billion during April-December 2009 as compared with US$ 70.9 billion during April-December 2008. At this level, the invisibles surplus financed 66.1 per cent of trade deficit during April-December 2009 as against 72.0 per cent during April-December 2008. Current Account Deficit Net invisibles (invisibles receipts minus invisibles payments) stood at US$ 59.2 billion during April-December 2009 as compared with US$ 70.9 billion during April-December 2008. At this level, the invisibles surplus financed 66.1 per cent of trade deficit during April-December 2009 as against 72.0 per cent during April-December 2008. Net capital flows at US$ 43.2 billion in April-December 2009 was much higher as compared with US$ 5.8 billion in April-December 2008 mainly due to larger inflows under FDI, portfolio investments and NRI deposits Due to lower outward FDI, the net FDI (inward FDI minus outward FDI) was higher at US$ 16.5 billion in April-December 2009 as compared with US$ 14.3 billion in AprilDecember 2008. Portfolio investment witnessed large net inflows of US$ 23.6 billion during AprilDecember 2009 as against a net outflow of US$ 11.3 billion in April-December 2008 due to large net FII inflows of US$ 20.5 billion.

Net external commercial borrowings (ECBs) inflow slowed down to US$ 2.3 billion in April-December 2009 (US$ 6.9 billion in April-December 2008) mainly due to increased repayments. The increase in foreign exchange reserves on BoP basis ( i.e., excluding valuation) was US$ 11.3 billion in April-December 2009 (as against a sharp decline in reserves of US$ 20.4 billion in April-December 2008). [A Press Release on the Sources of Variation in Foreign Exchange Reserves is separately issued]. The gross disbursements of short-term trade credit was US$ 10.1 billion during Q1 of 2009-10 almost same in Q1 of 2008-09. The repayments of short-term trade credits, however, were very high at US$ 13.2 billion in Q1 of 2009-10 (US$ 7.8 billion in Q1 of 2008-09). As a result, there were net outflows of US$ 3.1 billion under short-term trade credit during Q1 of 2009-10 (inflows of US$ 2.4 billion in Q1 of 2008-09) Banking capital mainly consists of foreign assets and liabilities of commercial banks. NRI deposits constitute major part of the foreign liabilities. Banking capital (net), including NRI deposits, were negative at US$ 3.4 billion during Q1 of 2009-10 as against a positive net inflow of US$ 2.7 billion during Q1 of 2008-09. Among the components of banking capital, NRI deposits witnessed higher inflows of US$ 1.8 billion in Q1 of 2009-10 (net inflows of US$ 0.8 billion in Q1 of 2008-09) reflecting the positive impact of the revisions in the ceiling interest rate on NRI deposits. Other capital includes leads and lags in exports, funds held abroad, advances received pending for issue of shares under FDI and other capital not included elsewhere (n.i.e.). Other capital recorded net outflows of US$ 1.6 billion in Q1 of 2009-10. Balance of Payments (BoP)
Merchandise Trade Exports

On a BoP basis, Indias merchandise exports posted a decline of 17.3 per cent in April December 2009 (as against a high growth of 27.5 per cent in the corresponding period of the previous year).
INDIA's cumulative value of exports for the first 11 months of fiscal 2009-10 (April-2009 to February2010) stood at US $ 152983 million (Rs 727345 crore) as against US $ 172379 million (Rs. 774585 crore) registering a negative growth of 11.3 per cent in Dollar terms and 6.1 per cent in Rupee terms over the same period last year. Country's cumulative value of imports for the period April, 2009February, 2010 was US $ 248401 million (Rs. 1180124 crore) as against US $ 287099 million (Rs. 1289412 crore) registering a negative growth of 13.5 per cent in Dollar terms and 8.5 per cent in Rupee terms over the same period last year. Oil imports during this 11-month period were valued at US$ 73230 million which was 18.2 per cent lower than the oil imports of US $ 89492 million in the corresponding period last year. Non-oil imports during April, 2009- February, 2010 were valued at US$ 175171 million which was 11.4 per cent lower than the level of such imports valued at US$ 197607 million in April 2008- February, 2009.

EXPORTS & IMPORTS (April-February, FY 2009-10)

In $ Million Exports including re-exports 2008-09 2009-10 Growth 2009-10/2008-2009 (percent) 172379 152983 -11.3 In Rs Crore 774585 727345 -6.1

Imports 2008-09 2009-10 Growth 2009-10/2008-2009 (percent) Trade Balance 2008-09 2009-10

287099 248401 -13.5

1289412 1180124 -8.5

-114721 -95418

-514827 -452779

Figures for 2008-09 are the latest revised whereas figures for 2009-10 are provisional

The trade deficit for April 2009- February, 2010 was estimated at US $ 95418 million which was lower than the deficit of US $ 114721 million during April 2008 -February, 2009.
Source: Federal Ministry of Commerce, Government of India

Imports Import payments, on a BoP basis, also remained lower recording a decline of 14.0 per cent during April-December 2009 as compared with a high growth of 35.6 per cent in the corresponding period of the previous year. According to the DGCI&S data, exports declined by 17.3 per cent, and imports growth was negative at 22.0 per cent led by the decline in both oil imports (a decline of 29.7 per cent) and non-oil imports (a decline of 18.4 per cent) during April-December 2009. On a BoP basis, the merchandise trade deficit decreased to US$ 89.5 billion during April-December 2009 from US$ 98.4 billion in April-December 2008 mainly on account of both lower oil and non-oil import payments

Inflows & Outflows from NRI Deposits and Local Withdrawals (In $ million)
Inflows 2006-07 (R) 2007-08 (PR) 2008-09 (P) 2008-09 (Q1) (PR) 2009-10 (Q1) (P) 19914 29401 37,089 9063 11172 15593 29222 32,799 8249 9354 Outflows Local Withdrawals 13208 18919 20,617 5157 5568

P: Preliminary, PR: Partially revised. R: revised SOURCE: Reserve Bank of India report India's Balance of Payments Developments during the First Quarter (April-June 2009) of 2009-10

Variation in Reserves During April-December 2009, there was an accretion to foreign exchange reserves

mainly on account of valuation gains. Also, inflows under foreign investments, NonResident Indian deposits and short-term trade credits have contributed significantly to the increase in foreign exchange reserves during April-December 2009. On balance of payments basis (i.e., excluding valuation effects), the foreign exchange reserves increased by US$ 11,300 million during April-December 2009 as against a decline of US$ 20,380 million during April-December 2008. The valuation gains, reflecting the depreciation of the US dollar against the major currencies, accounted for US$ 20,185 million during April-December 2009 as compared with a valuation loss of US$ 33,375 million during April-December 2008. Accordingly, valuation gains during April-December 2009 accounted for 64.1 per cent of the total increase in foreign exchange reserves.

KEY INDICATORS OF INDIA'S BALANCE OF PAYMENTS

2007-08 Merchandize Trade Exports ($ on BoP basis) Growth Rate (percent) Imports ($ on BoP basis) Growth Rate (percent) Crude Oil Prices, Per Barrel (Indian Basket) Trade Balance ($ billion) Invisibles Net Invisibles ($ Billion) Net Invisibles Surplus/Trade Deficit (Percent) Invisible Receipts/Current Receipts (Percent) Services Receipts/Current Receipts (Percent) Private Transfers/Current Receipts (Percent) Current Account Current Receipts ($ Billion) Current Payments ($ Billion) Current Account Balance ($ Billion) Capital Account Gross Capital Inflows ($ Billion) Gross Capital Outflows ($ Billion) Net Capital Flows ($ Billion) Net FDI/Net Capital Flows (Percent) Net Portfolio Investment/Net capital Flows (Percent) Net ECBs/Net capital Flows (Percent) 433.0 325.0 108.0 14.3 27.4 21.0 314.8 331.8 -17.0 74.6 81.4 47.2 28.6 13.8 28.9 35.2 79.2 -91.6 5.4

2008-09

2008-09 (Q1) (PR)

2009-10 (Q1) (P)

43.0 42.9 118.8 -31.4

-21.0 -19.6 63.9 -26.0

14.3 82.4 -119.4

89.6 75.0 48.1 30.0 13.7

22.4 71.3 44.2 26.2 13.8

20.2 77.7 49.9 28.9 17.2

337.7 367.6 -29.8

88.1 97.1 -9.0

77.5 83.3 -5.8

302.5 293.3 9.1 191.3 -153.4 89.2

90.9 79.7 11.1 80.5 -37.8 13.2

78.5 71.8 6.7 101.4 122.7 -5.3

Reserves Import Cover of Reserves (In months) Outstanding Reserves as at end period ($ Billion) 14.4 309.7 10.3 252.0 13.3 312.1 11.4 265.1

SOURCE: Reserve Bank of India report India's Balance of Payments Developments during the First Quarter (April-June 2009) of 2009-10 TOP

India's Merchandize Trade (2003-04 to 2008-09 )

Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 (AprilMarch) Exports 63.8 83.5 103.1 126.3 162.9 Growth (Percent) 30.8 23.4 22.5 29.0 5.4 Imports 78.1 111.5 149.2 185.6 251.4 Growth (Percent) 42.7 33.8 24.4 35.5 14.3

SOURCE: Federal Ministry of Commerce, Government of India

Gross Capital Inflows and Outflows (In $ Million)

Gross Inflows HEADS 200809 P Foreign Direct Investment Portfolio Investment External Assistance External Commercial Borrowings NRI Deposits Banking capital excluding NR Deposits Short-term trade Credits Rupee Debt Service April-March 200809 (Q1) (PR) 12137 40764 909 2760 9063 12889 10176 0 200809 P Gross Out flows April-March 200809 (Q1) (PR) 3170 44975 558 1293 8249 11007 7779 30 2009-10 (Q1) (P)

2009-10 (Q1) (P)

36258 128651 5,042 15,382 37,089 27,909 39,734 0

9612 38625 821 2092 11172 4405 10126 0

18762 142685 2,404 7,224 32,799 35596 45529 101

2779 30357 737 2448 9354 9588 13211 23

Other Capital TOTAL

12,391 302,456

2176 90784

1636 78489

8210 293310

2678 79739

3256 71753

R: Revised; P: Preliminary; PR: Partially Revised SOURCE: Reserve Bank of India report India's Balance of Payments Developments during the First Quarter (April-June 2009) of 2009-10

Business Services (In $ Million)

Receipts April-March 200809 P Trade Related Business & Management Consultancy Architectural, Engineering & other Technical Maintenance of Offices Others TOTAL R: Revised; P: Preliminary; PR: Partially Revised SOURCE: Reserve Bank of India Report on Balance of Payment, December 2008 2,008 4,847 200708 PR 2233 4433 2006-07 R 1325 4476 200809 P 1,642 3,512 Payments April-March 200708 PR 2285 3653 2006-07 R 1801 3484

Item

1,759

3144

3457

3,106

3173

3025

2,980 4,657 16,251

2861 4100 16771

2638 2648 14544

3,283 3,726 15,269

3,496 4,108 16715

4,032 3,522 15866

Recession and India's balance of payments

India's merchandise export figures, balance of payments surpluses and foreign exchange reserves suggest that the country has weathered the global recession well. But the manner in which this strength on the external account has been garnered gives cause for some concern, argue C. P. Chandrasekhar and Jayati Ghosh.

Following on figures pointing to a robust recovery in GDP growth, the evidence that India's month-on-month export growth has returned to positive territory after 13 months has generated much optimism. The value of aggregate merchandise exports during November 2009 stood at $13,199 million (Rs 61,462 crore), which was 18.2 per cent higher than its level in November 2008.

Part of the increase was on account of dollar depreciation, with the rupee value of exports rising by a lower 12.4 per cent. But even this is significantly positive. However, there is a case for exercising caution when interpreting this evidence as a sign of recovery. On recovery mode? First, there is a clear base effect operative here. The monthly value of India's exports in dollar terms had begun to decline since August 2008 and had fallen by 41 per cent by November 2008 as a result of the impact of the global recession. Also, November 2008 was the first month in recent times when export values declined significantly (by 13.5 per cent) when compared with the corresponding month of the previous year (Charts 1 and 2). Since the November 2009 performance is being compared with a month that saw a sharp downturn, even a modest recovery in absolute levels can deliver a creditable monthon-month growth rate. Second, in absolute terms the dollar value of exports in November 2008 was below its July 2008 peak value by 31 per cent. Third, India's exports in November 2009 were in absolute terms below the average level of July to September 2009, when the first signs of the export downturn bottoming out had been observed, with month-on-month declines falling from a high of 36 per cent in April 2009 to 14 per cent in September 2009. Since then export performance has slipped rather than improved. In sum, if at all anything can be said about the export figures it is merely that the downturn in exports has possibly bottomed out, but any significant recovery is yet to come. In fact, the evidence suggests that we are still faced with the danger that export performance could slip again. The limited buoyancy on the merchandise export front is disconcerting, also because of the effect that the global recession has had on India's exports of software and business services. Data for receipts from abroad under these heads are released by the Reserve Bank of India on a quarterly basis and are now available for the first two quarters of 2009-10. Those figures suggest that exports of software services fell from $24.2 billion during April to September 2008 to $21.4 billion during April-September 2009, and exports of miscellaneous non-software services fell much more sharply from $14.9 billion to $7.8 billion. The hardest hit in the latter area were business services, receipts from which fell from $8.4 billion to $5.1 billion between April-September 2008 and April-September 2009. The net result of this was that, even though remittances from non-resident Indians remained strong, net invisibles receipts fell sharply from $48.5 billion during April-September 2008 to $39.6 billion during April-September 2009. Given the importance of invisibles in the current account of India's balance of payments, this has meant that the country's current account deficit has widened from $15.8 billion to $18.6 billion. Unless this trend has corrected itself over the subsequent two months, the reduction in the rate of export decline does not amount to much in terms of a strengthening of the balance of payments since the global recession had its first impact. Despite these developments, the picture of India's balance of payments is one of strength rather than of weakness. The country's foreign exchange reserves, which fell by $2.5 billion during April-September 2008, rose by $9.5 billion during AprilSeptember 2009. The main reason for this was the large inflows of equity and debt capital. Inward FDI flows, which totalled $20.7 billion during April-September 2008, remained at $21 billion during the corresponding period of 2009. Portfolio inflows, which had fallen by $5.6 billion during April-September 2008 when foreign institutional investors booked profits and repatriated capital to meet commitments at home, rose by $17.9 billion during April-September 2009, when the crisis in the developed countries was still ongoing. India clearly has once again attracted the attention of institutional investors, resulting in a sharp rebound in the stock market in the country. This was not just an Indian phenomenon. According to the Financial Times (January 1, 2010): Russia's Micex index rose 802 per cent over the decade after a boom in commodities spurred its oil and metals industries. Brazil's Bovespa, again driven by the commodity boom, climbed 301 per cent. India's Sensex jumped 249 per cent. And property prices in emerging markets are once again rising. The reason for this rebound is now well-recognised. The boom has been driven by investments financed with cheap credit pumped into the economy as part of the effort to resolve the crisis in the financial sectors in the US, the UK and Europe. Cheap money

Exploiting this access, the banks, especially investments banks, have gone back to their old ways and decided to use the cheap money offered by central banks and governments to speculate in stock, commodity and property markets, wherever they appeared profitable. The fact that some emerging economies were much less affected by the recession and had active even if not buoyant stock and property markets, has made the investment of cheap money in these destinations an attractive option. In the event, the rush of capital to these markets fuelled a boom that delivered better than expected profits. India too has been a beneficiary of this speculative rush. As a result, according to the Reserve Bank of Ind ia's latest estimates of India's net international investment position, the stock of liabilities of the country to non-residents on account of direct investments and portfolio investments in equity securities has risen by $28.6 billion and $22 billion respectively between March and September 2009 (Chart 3). The fact that a substantial share is in the form of direct investment flows must not give too much comfort, because the distinction between direct and portfolio investments is not clear, with equity acquisitions of more than 10 per cent of the stock of a company by a single foreign investor being treated as direct investment. Very often even these investments are by financial investors looking to make capital gains rather than as long-term investors. They are as much hot money as pure portfolio investments. Reserve assets

Since these inflows were far in excess of India's current account deficit financing needs, the consequence was the accumulation of reserve assets. India's reserve assets abroad, which had fallen from $312.1 billion at the end of June 2008 to $252 billion by the end of March 2009, have risen by $29.3 billion to $281.3 billion over the six months ending September 2009. It is well known that since Reserve Assets consist of liquid and safe instruments, the return they yield is much below than that earned by foreign investors in the country's financial markets, resulting in a cost borne in foreign exchange. It is indeed true that a substantial part of the increase in Reserves during the April-September period was on account of gains from valuation changes following the depreciation of the dollar vis--vis other currencies in which reserves are held. But with net capital account inflows exceeding current account financing requirements by $9.5 billion, these inflows too played a role in inflating the value of reserves. In sum, not only was India exposing itself to the risks associated with the flow of speculative hot money financed with cheap credit in the recession hit developed countries, but it had to pay a monetary cost to accommodate those flows. In the circumstances, efforts such as those initiated by Brazil, to limit inflows of capital can serve the country well by contributing to currency and financial market stability as well as ensuring the appropriate management of foreign exchange.