Red-hot oil burns a hole in current account

For First Time After 2000, Current Account In BoP Ends In A Deficit During Q4

RUNAWAYoil prices have cast a shadow on India's macro numbers. For the first time in eight years, India recorded a deficit in its current account in the country's balance of payments during the fourth quarter of a fiscal. A sliding stock market and a major slowdown in debt offerings only add to the sense of gloom.
    On Monday, the Sensex fell to its lowest close in 14 months at 13461.60, down 340.62 points or 2.47% from its previous close. Bond yields rose as market sentiment was hit by concerns about tightening liquidity. Yield on the 10-year benchmark bond ended the day at 8.69%, rising from Friday's close of 8.58%.
    The current account during the fourth quarter of 2007-08 ended in a deficit despite a 36% rise in income from services and remittances from Indians abroad. This is mainly attributed to the surge in oil prices.
    The current account in the balance of payments measures the net position of a country's exports and imports of goods and services. A deficit implies that imports far outpace exports.
    An economy's current account deficit is also a measure of how much external savings it succeeds in absorbing, to enhance investment over the level permitted by domestic savings. India's current account deficit has consistently been below Plan targets. Even with an abnormal spurt in imports in the last quarter, thanks to soaring crude prices, the current account deficit amounted to $17.4 billion or 1.5% of GDP, according to a release by the Reserve Bank of India. At this level, the deficit is modest and entirely sustainable and desirable. The trouble, according to economists, would be if the deficit balloons out of hand in the coming months, thanks to ever rising crude prices.
    According to the latest provisional data released by the Reserve Bank of India, the current account deficit stood at $1041 million during the quarter ended March 2008 compared with a surplus of $2,563 million a year ago. 'Current a/c deficit still within acceptable levels'
    THIS is despite the fact that services income and remittances among others being high ($22.75 billion) to absorb the trade deficit of $23.79 billion during the quarter. India runs a deficit on the current account overall but over the last eight years, the last quarter of a fiscal has seen a hump in flows which results in a surplus on this account.
    The silver lining, however, is in the form of remittances by overseas Indians. Remittances touched a new high and even net foreign direct investment (FDI), which continued to be robust despite a huge growth in outbound FDI.
    Government managers reckon that it is too early to set-off the alarm bells. Last week, chief economic advisor Arvind Virmani told ET that the net (negative) effect of the oil price spurt on the current account deficit could be much less than what pessimists portend. This is because high oil prices (now at $143 a barrel) result in a higher income and demand for goods and services from oil exporting countries, which could be an opportunity for India, he said. According to Aditya Birla group chief economist Ajit Ranade it is quite heartening to note that despite high crude prices, the current account deficit at 1.5% of GDP is still within acceptable levels. "But we will have to watch out in the next quarter. If there is a slowdown in the global economy, we need to be also vigilant about the slackening of inflows through services exports," he said.
    Yes Bank chief economist Shubhada Rao said that the current account deficit was entirely due to the crude import bill. If crude prices continue to be over $130 a barrel, the current account will remain under stress. The overall balance of payments for the quarter ended in a surplus of $24.99 billion ($20.45 billion) on the back of better capital inflows of $25.4 billion ($17.13 billion) during the quarter.
    The current account deficit for the full fiscal year widened by a further $17.4 billion, 78% higher than previous year's deficit of $9.77 billion. Remittances also continued to post a strong growth. The year ended with the highest ever remittances as reflected in private transfers at $40.78 billion as against $27.94 billion a year ago. Net invisibles including remittances, software services income and investment income 36% increased from $53.4 billion to $72.65 billion. Capital account surplus during the quarter amounted to $25.42 billion during the quarter ended March 2008 driven largely by strong growth in FDI, portfolio investment and borrowings by India Inc.
    For the full financial year, the capital account surplus more than doubled to $108 billion, compared to $45.77 billion last year. Foreign direct investment ($15.54 billion), portfolio investment ($29 billion) and external commercial borrowings ($22.11 billion) accounted for a bulk of net capital inflows during the year.