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The Prime
Minister’s Economic Advisory Council presented a report on Balance of Payments
to the Prime Minister. According to the Report, the current account deficit
(CAD) for 2005/06 is projected at 2.9% of GDP. While it is appropriate for an
economy of our size with vast investment needs to be running a CAD, its size
and composition warrant continuous monitoring. At almost 3% of GDP, the CAD may
still be in the comfort zone provided it goes to finance productive investment.
There is a growing
divergence between the trade data as reported by RBI and as compiled by DGCIS.
During the current year, trade deficit under the DGCIS data is projected at
5.2% of GDP vis-à-vis 7.7% under the BoP data thereby widening the divergence
to 2.5 percentage points of GDP. This results in a corresponding divergence in
the CAD as well. If the CAD is calculated using the DGCIS trade data, it would
amount to only 0.3% of GDP whereas it goes up under the RBI data to 2.9% of
GDP. The divergence, particularly in import figures, may be due to one off
payments for defence and civilian aircraft imports. It may be useful to be as transparent
as possible in the published data in the public domain so as to manage
expectations on the BoP outlook which is important to inspire the trust and
confidence of potential investors, both domestic and foreign.
Invisibles
continue to be buoyant. The larger estimated outflow under investment income
this year compared to last year, partly owing to the payout of accumulated
interest on India Millennium Deposits in December 2005, will be more than
offset by increases in software exports and remittances. Indeed, net invisibles
are projected to increase from 4.5% of GDP last year to 4.8% of GDP this year.
As a proportion of
GDP, capital flows are slated to decline marginally from 4.5% to 4.1% of GDP.
Nevertheless, they are likely to be large enough in 2005/06 to fully bridge the
current account deficit and leave a margin of $10.7 billion on top of that as
net accretion to reserves.
The Executive
Summary of the Report “Outlook for the Balance of Payments 2005/06 &
2006/07” is as follows :
This note presents
the balance of payments (BoP) outlook for the current year (2005/06) and next
year (2006/07). The estimates are based
on the reported BoP data for the first half of 2005/06 (April - September 2005)
and the provisional figures for merchandise exports and imports up to January
2006. The note highlights the following:
(i)
The current account deficit (CAD) for 2005/06 is projected
at 2.9% of GDP. While it is appropriate for an economy of our size with vast
investment needs to be running a CAD, its size and composition warrant continuous
monitoring. At almost 3% of GDP, the CAD may still be in the comfort zone
provided it goes to finance productive investment.
(ii)
There has always been a divergence between the merchandise
trade data of DGCIS and BoP (RBI) owing largely to three important reasons.
First, DGCIS tracks physical imports and exports while the BoP data tracks
payment transactions relating to merchandise trade. Second, government imports
which are exempt from customs duty fail to be captured by the DGCIS data.
Defence imports fall into this category. Third, DGCIS does not capture imports
that do not cross the customs boundary (e.g.: oil rigs, some aircrafts) while
they are still paid for and enter the BoP data.
(iii)
The divergence between DGCIS data and RBI data is not uniform
but shows variations across years. After being relatively small since 1998/99,
the differences in the trade numbers between the two sets of data began to
widen once again since the July-September quarter of 2004/05. During 2004/05,
trade deficit as a proportion of GDP under the DGCIS data was 4.1% against
5.3% under the BoP data resulting in a divergence of 1.2 percentage points
of GDP. During the current year, trade deficit under the DGCIS data is projected
at 5.2% of GDP vis-à-vis 7.7% under the BoP data thereby widening the divergence
to 2.5 percentage points of GDP. This results in a corresponding divergence
in the CAD as well. If the CAD is calculated using the DGCIS trade data, it
would amount to only 0.3% of GDP whereas it goes up under the RBI data to
2.9% of GDP. The divergence, particularly in import figures, may be due to
one off payments for defence and civilian aircraft imports. It may be useful
to be as transparent as possible in the published data in the public domain
so as to manage expectations on the BoP outlook which is important to inspire
the trust and confidence of potential investors, both domestic and foreign.
(iv)
Invisibles continue to be buoyant. The larger estimated outflow
under investment income this year compared to last year, partly owing to the
payout of accumulated interest on India Millennium Deposits in December 2005,
will be more than offset by increases in software exports and remittances.
Indeed, net invisibles are projected to increase from 4.5% of GDP last year
to 4.8% of GDP this year.
(v)
As a proportion of GDP, capital flows are slated to decline
marginally from 4.5% to 4.1% of GDP. Nevertheless, they are likely to be large
enough in 2005/06 to fully bridge the current account deficit and leave a
margin of $10.7 billion on top of that as net accretion to reserves.
* * *
YSR/DS/CS
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EAC report to PM on Balance of Payments Outlook
