India’s current account deficit shrunk to $5.5 billion in July-September 2007 as remittances by non-residents offset rising oil prices, higher import bill and slower growth in software exports. The overall balance of payments (the country’s external sector balance sheet) rose to a record surplus $29.2 billion during the same period.

According to the preliminary figures released by RBI, the current account deficit narrowed to $5.5 billion from $6.2 billion a year ago. However, due to a capital account surplus (on the back of FII and ECB inflows) of $33.9 billion ($8.8 billion), the overall balance of payments ended in a record surplus of $29.2 billion ($2.3 billion) during July-September 2007.

According to Amit Tandon who heads Fitch Ratings in India, going forward, however, one has to be watchful of the trade deficit while at this juncture it is difficult to estimate whether the strong numbers for remittances and FII inflows or ECBs will continue. While the current account records transactions against purchase of goods and services or income from a service, capital account inflows are investments or debt-creating flows and are more volatile in nature.

The balance of payments is the sum of the current and capital account transactions in a given period.
In the current account, net invisibles (items such as software, travel & tourism income and remittances by the Indian Diaspora) ended in a surplus of $16.5 billion as against $10.6 billion in the second quarter in 2007. This was due to strong growth in remittances by overseas Indians, which is reflected under the head ‘private transfers’. Private transfers during the quarter rose to $10.1 billion — almost twice of $5.4 billion a year ago.

The trade balance during the period has worsened with imports growing much faster than exports. Exports during the quarter rose to $37.9 billion from $31.8 billion a year ago, but imports during the quarter were even higher amounting to $59.6 billion as against $48.6 billion in the same period a year ago. As a result, the trade deficit widened to $21.7 billion from $16.7 billion.

In the capital account, foreign inflows through the portfolio investment ended up being higher during the quarter. While net FDI inflows were marginally lower at $2.1 billion ($2.9 billion), net portfolio investment went up steeply to $10.8 billion ($ 2.2 billion). Net inflows through external commercial borrowings were also higher at $3.6 billion ($1.7 billion). As for short-term credit, net inflow amounted to $3.6 billion as against the net inflow of $2.6 billion in the same period a year ago.

RBI in its latest release has incorporated certain revisions in line with best international practices. The revisions for financial years 2005-06 and 2006-07, now among other things, take into account the issue of potential overlap between business services and software services.

Besides, suppliers’ credit (credits for financing imports into India extended by the overseas supplier) up to 180 days was not covered explicitly in India’s balance of payments. These data were implicitly included in the capital account under the heads ‘other capital not included elsewhere’ and the ‘errors and omissions’. Now, these data are covered as a part of short-term trade credit to India with effect from financial year 2005-06 in the standard format of the balance of payments presentation and from end-March 2005 under the external debt.

-India Times

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