Economic Survey Analysis : Balance of Payments
An IAS aspirant must study the Economic Survey of the respective year. The Economic Survey is one of the most reliable sources released by the Government of India. Here, we have provided an analysis of India’s balance of payment statement and how they managed significantly to overcome the issue of huge current account deficits (CAD) in the recent years.
Balance of Payments of India
- Despite restraint in India’s export volume, India’s external sector position has been a snug, with the current account deficit (CAD) progressively toning convincingly from US$ 88.2 billion (4.8 per cent of GDP) in 2012-13 to US$ 22.2 billion (1.1 per cent of GDP) in 2015-16.
- The current account deficit (CAD) further narrowed in the first half of 2016-17 to 0.3 per cent of GDP, while during the same period in 2016-17 (H1); sharp contraction in the trade deficit outweighed the decline in net invisible earnings.
- The fall of international crude oil prices resulted in a decline in oil import spending by around 18 per cent, which together with a sharp decline in gold imports led to a reduction in India’s overall imports (on BoP basis).
- The net services bill declined by 10 per cent in the first half of 2016-17 despite an increase in services receipts (4.0 per cent) as growth in services payments was higher (16 per cent) though the growth of receipts of software was marginal and financial services receipts reduced.
- Unresponsive income conditions in source countries, particularly in the Gulf region due to a downward spiral in crude oil prices continued to weigh down on remittances by Indians employed overseas as private transfers moderated to US$ 28.2 billion in the first half of 2016-17 from US$ 32.7 billion in the first half of 2015-16.
- Despite higher net repayments on foreign borrowings and fall in banking net capital with the strengthening of foreign currency assets by banks and a decline in NRI deposits (net), robust inflow of foreign direct investment (FDI) and net positive inflow of foreign portfolio investment (FPI) were adequate to finance current account deficits (CAD) leading to an accumulation of foreign exchange reserves in the first half of 2016-17.
- The net FDI flows of US$ 21.3 billion have registered a growth of about 29 per cent over the corresponding period of last financial year.
- There was a net inflow of portfolio investment amounting to US$ 8.2 billion in the first half of 2016-17 as against outflow of US$ 3.5 billion in the first half of 2015-16.
- The banking capital has registered a net outflow of US$ 6.8 billion, mainly on account of acquisition of foreign currency assets by banks, while the net repayment of external commercial borrowings resulted in an outflow of US$ 4.6 billion in the first half of 2016-17.
- On Balance of Payment basis, with net capital flows remaining higher than the CAD and hence there was net accumulation of India’s foreign exchange reserves (on BoP Basis).
Foreign exchange reserves
- In the first half of 2016-17, India’s foreign exchange reserves have increased by US$ 15.5 billion on the BoP basis (i.e., excluding valuation effects), while in nominal terms (i.e., including valuation effect) the increase was to the tune of US$ 11.8 billion.
- The loss due to changes in the valuation of US$ 3.7 billion, largely reflects the appreciation of the US dollar against major currencies of the world.
- The inflows on account of Foreign Investment Institutions (IIs), specifically into the equity segment, and positive attitudes generated by a narrower CAD in the first half of 2016-17 helped the rupee to move in a slender range, which subsequently leads the depreciation of the rupee could be attributed largely to the strengthening of the US dollar globally following the US presidential election results and tightening of monetary policy by the Federal Reserve.
- On the other hand, in 2016-17 so far, the rupee has performed better than most of other emerging market economies (EMEs).
- During the financial year 2016-17 (April-December), on the y-o-y basis, the rupee has depreciated by 3.4 per cent against US dollar as compared to the depreciation of the Mexican peso (14.4 per cent), South African Rand (8.6 per cent) and Chinese Renminbi (6.3 per cent).
- The rupee depreciated in terms of the nominal effective exchange rate (NEER) against a basket of 6 and 36 currencies during April-December 2016.
- However, the 6-currency and 36-currency REER (Trade-based; Base year: 2004-05=100) appreciated by 6.1 per cent and 5.6 per cent, respectively as at end-December 2016 over end-March 2016.