The Hindu Business Line : An expert view on current account deficit

If you take the trade deficit and annualise it, it goes up to $80 billion which is almost eight per cent of the GDP in dollar terms. Of course, these numbers get offset by export of services and inward remittances and the resultant current account deficit is only 1 per cent (GDP).

If you leave out remittances, the current account deficit is almost 4.5 per cent, which could be a cause for worry.

Among export items, textile and footwear are the most negatively impacted. In fact, the export slowdown in other sectors is not as bad as it is in these two sectors.

A remarkable fact is the upsurge in capital flows. Net inflow for the six-month period is up almost 150 per cent, from $20 billion to $50 billion. We might have ended the fiscal in the range of $100 billion, which would be 10 per cent of our GDP. But there are signs that inflows may have slowed down and may not double over the remaining six months. In the third quarter, ECB norms were tightened and FII inflows were affected due to the restrictions on participatory notes. So by the end of the fiscal, we might still have net inflows of $80 billion.

Net FDI has actually gone down to $7.5 billion from $11 billion. Outflow of FDI has doubled to $7.4 billion because of Indian corporate acquisitions overseas.

There is a special acknowledgement of suppliers’ credit. Since it is short-term credit, it was not shown previously in the capital flows. But several committees have pointed out that export receivables and payables can cumulatively constitute a large number. That this should be captured is a move towards alignment with best practices internationally.

The value of the exchange rate is going to be important and will be watched very carefully. Gross inflows of $160 billion could have put a lot of pressure on the rupee.