India’s balance of payments (BOP) improved dramatically in the third quarter (October-December 2013) of the current financial year. In releasing the data a full three weeks before the scheduled date in end-March, the Reserve Bank of India has, though not for the first time, broken with convention to share the good news with the markets as soon as it could. The significant piece of news in the BOP data for the third quarter is the dramatic narrowing of the current account deficit (CAD) to $4.2 billion (0.9 per cent of GDP) from $31.9 billion (6.5 per cent) in the same period last year. Even compared with the preceding quarter (July-September) when the CAD was $5.2 billion (1.2 per cent), the performance is impressive. Clearly, the positive trends in India’s BOP are getting entrenched and do not represent a one-off development. On a cumulative basis, during the nine months of 2013-14, the CAD at $31.1 billion (or 2.5 per cent) marks a big improvement over the corresponding period last year when it was $69.8 billion (or 5.2 per cent).
The lower CAD was primarily on account of a decline in the trade deficit as merchandise exports picked up and imports, especially of gold, moderated. There is no doubt at all that the rupee depreciation has helped in boosting exports — they clocked 7.5 per cent growth in the third quarter. On the other hand, merchandise imports fell by 14.8 per cent as against an increase of 10.4 per cent in the third quarter of 2012-13. The decline was mainly due to a sharp fall in gold imports which added up to $3.1 billion as compared to $17.8 billion a year ago, All these helped in contracting the merchandise trade deficit by about 43 per cent to $33.2 billion. The vast improvement in the current account is at the centre of a smart recovery in India’s external account. The rupee has remained stable for a fairly long time and foreign investors with a higher risk appetite are sensing better opportunities in India. However, while due credit should be given to the government and the RBI, there is a need for continued vigilance. Lower non-bullion imports reflect the ongoing economic slowdown. The government’s clampdown on gold imports through tariffs and administrative measures might have paid off, but there is enough evidence that a part of the gold trade has moved underground with large-scale smuggling starting again. Two other areas of concern are that iron ore exports are still restricted while coal imports have increased dramatically, aggravating the trade deficit. These are structural problems, and as long as they exist the external economy will remain vulnerable. Any pick-up in growth would see a rise in imports, and export performance needs to remain robust.