Is the economy scuttling back to June 1991 phase under the very person who partly steered the nation out of the crisis under an able prime minister. The difference is that back then we had both an able prime minister in PV Narasimha Rao and an equally able finance minister in Manmohan Singh. But only difference today is that Manmohan has become comatose or nearly brain-dead. And the worries arise from the record current account deficit and record external debt positions of the country.
While rising oil and gold imports pushed up the current account deficit (CAD) touched a record a high of 4.8 percent of GDP in FY13, which is much lower than consensus forecast, aggressive borrowing by corporates has left the country’s external debt vulnerable, which got worsened following the sinking rupee.
According to the RBI data released two days in advance, CAD, which is the difference between the outflow and inflow of foreign currency, however, moderated "sharply" to 3.6 per cent of GDP in the last quarter of 2012-13 fiscal after it touched a historic high of 6.7 per cent in the October-December quarter. The CAD was 4.4 per cent in the March quarter of 2011-12. The country’s external debt shot up 13 percent at $390 billion in FY13 from $345.5 billion at a year ago, due to a sharp spike in short-term trade credit and external commercial borrowings (ECBs) on the back of high current account deficit, the Reserve Bank said.
"The high current account deficit witnessed during 2012-13 and it's financing increasingly through debt flows particularly by trade credit resulted in significant rise in external debt during FY13," RBI said. The increase in the debt during 2012-13 was primarily on account of rise in short-term trade credit. There has been sizeable rise in ECBs and rupee denominated non-resident Indian deposits as well.
The CAD was at $78.2 billion (4.2 per cent) in 2011-12 fiscal, but a higher oil and gold imports pushed it up to $87.8 billion (4.8 percent) last fiscal, RBI data showed. A gap of over 2.5 per cent is not economically sustainable in the long-term. The RBI said petroleum and gold constituted about 45 percent of total merchandise imports during 2012-13. While petroleum import rose 9.3 percent, gold import declined 4.8 percent during the fiscal. For the full fiscal, gold import stood at $53.8 billion, down from $56.5 billion, while crude import rose from $155 billion to $169.4 billion.
According to the data, trade deficit in 2012-13 remained at an elevated level of $195.7 billion on account of a decline in merchandise exports by 1.1 percent and rise in imports by 0.5 percent on a year-on-year basis. The finance ministry, meanwhile, said "the short-term increase or decrease in CAD should not be a cause for either optimism or pessimism and that we must look at the figure at the end of the year where the CAD stands." The rupee had touched a record low of 60.76 to the dollar yesterday. After the CAD data, the domestic currency recovered to 60.23 to the dollar, while benchmark Sensex welcomed the numbers with a 323-points cheer. "Markets have been over reacting as we have seen in the case of prediction for CAD last year which were much higher than 5 percent and we have seen that it is much lower than 5 percent," the ministry said.
Decline in exports was due to the fall in outbound shipment of manufactured items like engineering goods, textiles, gems and jewellery and also primary products like iron ore and minerals. The RBI said CAD widened in 2012-13 on account of "burgeoning trade deficit, decline in net invisible earnings due to sharp increase in investment income payments and only a modest rise in net services receipts". It said while the FDI inflows moderated during 2012-13, there was a surge in portfolio investment during the period. Net foreign direct investment moderated to $19.8 billion in 2012-13 from $22.1 billion in 2011-12, while net portfolio investment rose to $26.7 billion in from $16.6 billion. "While rise in portfolio investment was essentially due to increase in equity investment, debt investment by foreign institutional investors has been lower as compared to the previous year," RBI said.
During 2012-13 there was an accretion of $3.8 billion in the forex reserves compared to a draw-down of reserves worth $12.8 billion in 2011-12, it said. On the external debt front, the RBI said, “the magnitude of increase in external debt was offset to some extent due to valuation change (gain) resulting from appreciation of the US dollar against the rupee and other global currencies," the RBI. TBI further said that excluding the valuation change due to the movement of the US dollar against major international currencies and rupee, the external debt as at end-March 2013 would have increased by $55.8 billion. However, the actual increase was lower at $44.6 billion.
As per the data, share of ECBs ($120.9 billion) continued to be highest at 31 percent of the total debt, followed by short term debt (24.8 percent) and NRI deposits (18.2 percent). Trade credit components of external debt (both long-term and short-term) showed an increase of $20.3 billion during the period, while NRI deposits jumped $12.2 billion to $70.8 billion as at end-March 2013 primarily on account of increase in rupee denominated NRI deposits reflecting the impact of deregulation of interest rates on these deposits in December 2011.
As far as the currency composition of the debt is concerned, the US dollar- denominated debt continued to be the largest component with a share of 57.2 percent, followed by rupee at 24 percent, SDR at 7.5 percent, the yen at 6.3 percent and the euro at 3.5 percent. The ratio of foreign exchange reserves to external debt as at end-March 2013 at 74.9 percent was lower than the level of end-March 2012 when it stood at 85.2 percent.
