Net primary and secondary income flows are smaller

The Reserve Bank of India (RBI), on Monday, said that the Current Account Deficit (CAD), as a proportion of gross domestic product (GDP), during the second quarter (July to September) of 2012-13 increased to 5.4 per cent from 4.2 per cent in the second quarter of the previous year.

“Notwithstanding a reasonable increase in net services receipts, net invisibles earnings could finance only a lower proportion of trade deficit as net ‘primary and secondary’ income flows were relatively smaller. Consequently, the CAD worsened to $22.3 billion in the second quarter of 2012-13 from $16.4 billion in the preceding quarter and $18.9 billion in the second quarter of 2011-12,” the RBI said in its report on developments in India’s Balance of Payments (BoP) position.

Surge in inflows

Despite the surge in net inflows during the quarter under review led by foreign direct investment (FDI) and portfolio investment, there was a marginal draw-down of reserves by $0.2 billion, mainly due to the higher level of current account deficit.

On a BoP basis, merchandise exports recorded a decline of 12.2 per cent (year-on-year) as against an increase of 45.3 per cent during corresponding quarter of 2011-12. Similarly, imports registered a decline of 4.8 per cent (year-on-year) as against an increase of 38.1 per cent.

Steeper decline in exports than that in imports led to the widening of trade deficit to $48.3 billion during the period under review from $44.5 billion during the corresponding quarter of the previous year.

However, in this period, net services receipts recorded a rise of 11.4 per cent (year-on-year), led by software, construction, information services, business services.

Net receipts under secondary income (private transfers) recorded a moderate increase of 2.9 per cent during the quarter and were partly offset by the net outflow under primary income (investment income).

In the half-year period ended September 2012, CAD was higher at $38.7 billion against $36.3 billion in the same period of the previous year. As a proportion of GDP, CAD rose sharply to 4.6 per cent in the first-half of 2012-13 from 4 per cent in the the previous year “reflecting slowdown in GDP and a significant depreciation in rupee.”

Net inflows under the financial account were lower during April-September 2012 over the corresponding period of the previous year, mainly due to decline in FDI, external commercial borrowings (ECBs) and banking capital.

“Moderation in capital inflows coupled with continued elevated level of CAD led to only a marginal accretion of $0.4 billion in foreign exchange reserves during April-September 2012,” the RBI added.

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