The Hindu Business Line : Invisible support

Earnings on the invisibles account largely held up in the fourth quarter of last year but a protracted recovery in the West could cause strains not evident so far.

Ironical as it may seem, the turnaround in the country’s current account situation is an indicator of how the global economy’s vicissitudes since September last have affected us. For the first time in two years, the current account recorded a surplus of a little over $4.7 billion in the fourth quarter of 2008-09. Taken over the year however, the current account reflected the usual trend with the deficit being $10 billion more than the previous year. The quarte rly variation shows just how much the country’s trade with the world contracted after the global meltdown. Exports fell by 24 per cent in the fourth quarter against a rise of 47 per cent in the corresponding quarter of the previous year while imports declined by 27.3 per cent after a gap of almost seven years. Lower crude prices helped check the import bill but the slowdown of the economy also constricted demand for non-oil imports. The fourth quarter data also express a more positive side of the crisis that policymakers may want to take note of.

The contraction in merchandise trade was far greater than the decline in earnings on the invisibles account. Although the fourth quarter witnessed a contraction in invisibles, earnings from software and remittances did not decline particularly sharply in the January-March period over the previous months. In other words, software exports and remittances were affected less by the post-September events than were merchandise exports. This is good news because it suggests the resilience of the information technology sector to tackle demand contraction in Western markets more nimbly than merchandise exports. That remittances continued on the same scale through the year is a back-handed compliment to the Indian banking system for continuing to inspire confidence in non-resident Indians as a safe haven for their foreign exchange earnings. In effect, the balance of payments shows the impact of global recession was partly neutralised by the strengths of service sector exports, overseas workers and India’s financial system. However the coming months will not be easy if the World Bank and Bank of International Settlements are to be believed; both predict a protracted recovery in the West and that could put a strain on the invisibles earning potential not evident so far.

A shrinking external sector does not bode well for India even if the capital account shows a pick up through heightened flows. Just how the new trade policy and the Budget will factor these elements in their scheme of things will be evident soon.

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Current account turns surplus on lower trade deficit
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