Any bout of global risk aversion and thus deleveraging could spike the funding risks
India's current account deficit worsened in the last quarter of FY12, posting an all-time high deficit of $21.7 billion, as against the (upwardly revised) deficit of $19.9 billion in the third quarter of FY12. This despite the fact that seasonally last quarter of the financial year generally posts better numbers in terms of trade deficit, but primarily owing to higher crude and gold imports and only marginal improvement seen in exports, the print remained worrisome.
Overall CAD posted 4.5 per cent of GDP in the fourth quarter and ended the year with an all time high deficit of 4.2 per cent GDP in FY12 compared with 2.7 per cent of GDP in FY11 – way above the RBI’s comfort zone.
In the trade account, exports decelerated further to 3.8 per cent YoY in the fourth quarter compared with 8.3 per cent YoY in the third quarter, even though imports continued to remain buoyant at 22.6 per cent YoY in the fourth quarter as against 23.3 per cent YoY in the third quarter. Trade deficit remained steady at $51.5 billion, increasing 70.7 per cent YoY in the fourth quarter.
Overall for FY12, trade deficit posted 10.3 per cent of GDP compared with 7.8 per cent of GDP in FY11. Moreover, exports decelerated 23.7% in FY12 compared to 37.3% in FY11, while imports growth accelerated growth accelerated to 31.1% (from 27% YoY in FY11). A large part of imports growth could be attributed to higher oil and gold prices with imports of oil and gold & silver rising 46.9% and 49.4% respectively. We have been arguing in the past that high inflation and inflationary expectations have been driving gold imports as a natural hedge, these numbers further validate the same. Managing unhinged household inflationary expectations should be treated crucial by authorities if the current slowdown in gold imports need to be sustained and fiscal management would indeed play an integral role. However, oil imports are more inelastic in nature.
Net invisibles decelerated in the fourth quarter, with software services exports growth decelerating to 8.1 per cent YoY from 12.6 per cent YoY in the previous quarter. However, we did see remittances from rupee increasing 24 per cent YoY. For the whole financial year however, net invisible growth accelerated sharply to 31 per cent YoY in FY12 from 6.5 per cent YoY in FY11, primarily on the back of remittances growing sharply 19.5 per cent YoY compared with 2.6 per cent in FY11.
Capital account surplus improved further in the fourth quarter of FY12, widening $16.6 billion against $7.7 billion in the third quarter. While net FDI ($1.35 billion) was lower compared with the third quarter ($4.9 billion), portfolio investment nullified a large part of it but posting a healthier figure compared with the third quarter. FII portfolio equity inflows rose sharply, driven by the improved global capital market environment at the beginning of the year Besides, in debt flows loans and banking capital rose as well when seen against the third quarter.
In the full year of FY12, capital account surplus remained steady at 3.7 per cent of GDP in FY12 as was in FY11 ($67.8 billion in FY12 compared with $61.6 billion in FY11).
Overall balance of payment (BoP) deficit narrowed in the fourth quarter of FY12 to -$5.7 billion from -$12.8 billion in the third quarter. However, in full year FY12, overall BoP moved into a deficit (for the first time since 2009) of -$12.8 billion compared with a surplus of $13.2 billion in FY11.
External debt rose to $345.8 billion (20 per cent of GDP) in FY12 compared with $305.9 billion (17.8 per cent of GDP) in FY11. But more ominously, the major part of external debt was driven by short term debt (trade credits, commercial banks borrowings and FII investments in T-bills), including residual maturity, consisting around 42.7 per cent of the total debt in FY12.
Net international investment position (NII) worsened at -$244.8 billion (-13.9 per cent GDP) at the end of fiscal 2012, compared with -$203.6 billion (-11.85 per cent of GDP) as on March 2011. While our international financial liabilities increased by $38.6 billion from March 2011 owing to an increase in FDI, ECBs and trade credits; international financial assets decreased by $2.7 billion since March 2011 as FDI abroad increased by $10.9 billion besides a dip in reserve assets by $10.4 billion since the end of the last financial year.
The outlook remains somber, though CAD is likely to reduce in FY13.
A few positives have cropped up lately which could support the current account, namely a sharp correction in India’s oil basket (around 20% since FY13 beginning) and commodity prices, likely sustained decline in gold imports and sustained undervalued INR driven boost on exports and import substitution (and somewhat slower import consumption due to slow domestic demand). All these could help the CAD close FY13 at ~3.6-3.7% of GDP. That said, the current quarter may see the trade deficit in the higher territory, as has been the seasonal factor in general, which could keep the CAD sticky close to or even above 4% of GDP in 1QFY13.
But BoP would largely remain in deficit in the coming quarters and thus a persistent pressure of flows requirement to finance the current account deficit and bridge the gap will likely remain. On that front, any bout of global risk aversion and thus deleveraging could spike the funding risks. On the same lines, another bout of global liquidity should ease the funding risks.
That said, the domestic policy arena continues to play a vital role for sustaining CAD in the manageable territory. Despite a rather damp capital flows seen in 1QFY13 so far, pro-reform policies could change the investors’ perceptions and flows mood.
On that front, reigning in fiscal slippages would not only contain domestic demand and thus inflationary expectations (and, thus gold imports) but also improve sagging business sentiments to bring in non debt creating FDI flows.
In the shorter run, monetary authorities may create avenues for further flows by introducing schemes like rupee bonds, special dollar deposit schemes etc, apart from managing forex volatilities.