India’s Balance of Payments update: 2006-07

RBI has released the latest Balance of Payments for the 4th quarter (i.e. Jan-Mar) 2006-07 and alongside has released preliminary findings for the entire financial year 2006-07.

Here is a quick summary:

Current Account:

  • Exports of goods increased by 21 % during 2006-07 compared to 23 % in 2005-06. Exports grew mainly on account of tea, spices, engineering and petro goods.
  • Imports growth at 22 per cent in 2006-07 (32 per cent in 2005-06). Imports grew mainly on account of non-oil imports and not oil-imports as it has generally been the case.
  • Non-oil imports increased by 25% in 2006-07 (21.8%  in 2005-06). The major non-oil import items were capital goods, metalliferrous ores, metal scrap and gold and silver.
  • Crude oil imports during 2006-07 recorded some moderation in growth at 30.4 % (47.3 % in 2005-06).  The slowdown in oil imports was largely because of a moderation in crude oil prices. The average price of the Indian basket of international crude (a mix of Dubai and Brent varieties) stood at $ 62.4 per barrel during 2006-07 as compared with US $ 55.4 per barrel during 2005-06. This implies that the prices increased by 13% in 2006-07 much lower than 42% increase seen in 2005-06. In volume terms, the oil import demand rose to 13% in 2006-07 from 8 % in 2005-06, tracking the growth in industrial sector.
  • The service exports increased by 37% in 06-07 compared to 68% in 05-06. Software exports increased by 29% on 06-07 compared to 35% in 05-06.
  •  Capital account:

  • FDI has a larger share in foreign investments than FII, a trend last seen in 2002-03. Outward FDI and FII have also grown sharply at 273% and 85%, showing Indians appetite for investing abroad is increasing.
  • External Commercial Borrowings have grown at a shocking rate of 491% this year and are now at about USD 16 billion.That is why RBI revised the rates corporates can pay for ECB. 
  • The total capital flows have increased by 92% and despite the increasing current account deficit, we have a huge BoP surplus at USD 36.6 billion, an increase of 143%.
  • My view is:

    Current Account deficit has widened by only 5% in 06-07 compared to 70% in 05-06 and is at about 1% of GDP. Now, as the Rupee has been appreciating (it is now in the 41 Rs= 1$ compared to 43.5-44 range till March 31, 2007) the trade balance should worsen (as imports get cheaper and exports expensive). It is already happening as per the latest press release, imports have been rising and exports slowing.

    So it would all depend on how much RBI intervenes in forex markets. If it doesn’t given the high capital flows, the currency would appreciate. But then India has a current account deficit and the currency should depreciate!! If RBI lets the exchange rate to markets it would be interesting to see the rupee level ahead.

    Another problem is with high investments needed in infrastructure we would need extra foreign capital, as currently investments are more than available savings (as per latest CSO estimates, Savings is 35% of GDP and Investments 37% of GDP) . That means more investments and which means more current account deficit. So, it is a bit of a mixed story and let’s see how things move ahead.

    2 Responses to “India’s Balance of Payments update: 2006-07”

    1. Impact of dollar depreciation on US trade deficit « Mostly Economics Says:

      […] Impact of dollar depreciation on US trade deficit Currently, one of the most important developments we see is depreciation of the dollar. It has been a major source of concern for Indian exporters and India’s Balance of Payments. […]

    2. Jeanna Dorch Says:

      Thanks for the great post!

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