CURRENT ACCOUNT SURPLUS IN Q4 2006-07 IS NOT A TREND SETTER–PHD CHAMBER

ECONOMY STILL HAS HUGE PENT-UP IMPORT DEMAND

New Delhi, Monday 16th July 2007 – India has yet to wait for sometime to become a surplus current account balance country on an annualized basis. Many of the factors that decide the current account position , such as capital flows, balance of trade etc have to stabilize over a period of time, according to an analysis made by the PHD Chamber.

The PHD Chamber maintained that the current account surplus registered in the last quarter, (Q4) of the 2006-07 - January-March - at US $2.6 billion, though helped in bridging the annual (2006-07) current account deficit to US$ 9.6 billion, there is no conclusive proof that this trend may set a new path. For the last quarter of 2005-06, also, the current account was in surplus at US $ 2.8 billion despite the previous quarters showing consistent deficits, like the year 2006-07.

Analyzing the reasons for the current account surplus in the last quarter of 2006-07, the Chamber said that the net capital inflows rose substantially to US $ 17.1 billion in Q4 of 2006-07 from US $ 10.0 billion in Q4 of 2005-06. The major sources of capital inflows were external commercial borrowings (ECBs), foreign direct investment (FDI), American Depository Receipts (ADRs)/Global Depository Receipts (GDRs) issues and overseas borrowings by the banks. This was supplemented by buoyant growth in invisibles led by exports of software services (29.9 per cent), travel receipts (19.5 per cent) and private transfers (19.1 per cent) during Q4 of 2006-07 over the Q4 of 2005-06. The merchandise exports have shown buoyancy in the Q4 by registering a growth of 11.4 per cent as compared to the same period in the previous year. These factors could nullify an almost 17 per cent increase in the imports during the Q4 of the 2006-07 as compared to the same period in the previous year and a slowdown in the portfolio equity inflows by foreign institutional investors (FIIs).

According to PHD Chamber, the economy still has a high degree of pent-up demand for non-oil imports, particularly for the capital goods, which can widen the trade deficit. This appetite for imports is triggered mainly by a buoyant domestic economy and partly by an appreciating rupee. The steadily climbing rupee should have brought down the import bill significantly. Yet, the imports for the quarter (Q4 2006-07) have increased to US$ 49.28 billion from US$ 42.3 billion registered during the same period in the previous year. It is also reported that for May 2007 import growth was 26.36 per cent, vaulting the trade account deficit to 45.7 per cent. The possibility of hardening of oil prices can create further take up the import bill, making achievement of current account surplus in the coming quarters a distant possibility.

According to the PHD Chamber, despite the recent sops that have been extended by the Government to ease the hardships of the exporters, there is a likelihood of export target being missed particularly in textiles, leather and in primary goods like coffee, tea etc, where demand is highly price elastic. In the case of hardware and software, where the US is a major importer –28 per cent of total electronic hardware exports and over 60 per cent of the total software exports -switching over to any currency other than dollar for trade transaction would be impossible. A correct picture of the impact of the rupee hardening against dollar can be discerned only when the new contracts are negotiated. The impact of the rising rupee will be least, if the Indian exporters are able to move up in the value chain or able to obtain additional orders.

Analyzing the trends in the macro-economic variables of countries having current account surplus, the Chamber said almost all the countries in that group have a positive trade balance. For example, China, Japan, Germany, Indonesia, Malaysia, Saudi Arabia etc have achieved the current account surplus by their sterling performance in exports and consequent positive trade balance. On the other hand, countries like US, Britain, France, Spain etc have trade deficits, which have resulted in huge current account deficits. Only a few countries like, Hong Kong, Egypt and Israel, which have relatively small negative trade balance but positive current account balance, thanks to heavy inflow of capital either through FDI route, private transfers or invisibles inflow like tourism. India should aspire to be in league of these countries.