CURRENT A/C DEFICIT UP TO $5.4 B IN Q3 DESPITE HIGHER GROWTH

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The current account deficit in India’s balance of payments (BoP) has widened despite higher growth in income from software services and a strong growth in remittances by the Indian diaspora. The current account deficit — derived from cross-border transactions of goods and services — widened to $5.4 billion during the quarter ended December 2007 on account of a bloated import bill caused by higher oil prices and industrial offtake.

Strong growth in portfolio inflows and external commercial borrowings has helped boost the capital account surplus, pushing the overall balance of payments (the country’s external sector balance sheet) to a record $26.7 billion.

According to the latest preliminary figures released by the Reserve Bank of India (RBI), the current account deficit widened to $5.4 billion during the quarter ended December 2007 against $3.7 billion in the same period, a year ago. However, due to a capital account surplus on the back of FII and ECB inflows of $31.5 billion ($10.98 billion), the overall balance of payments ended in a record surplus of $26.3 billion ($7.5 billion) during October-December 2007.

While the current account record transactions against purchase of goods and services or income from a service, capital account inflows are investments or debt creating flows and are more volatile in nature. The balance of payments is the sum of the current and capital account transactions in a given period. In the current account, net invisibles (items like software, travel & tourism income and remittances by the Indian diaspora) ended in a surplus of $19.96 billion against $12.85 billion in the same period, a year ago, on account of strong growth in remittances by overseas Indians under the head ‘private transfers’ amounting to $10.9 billion ($7.2 billion) during the quarter and also income from software services amounting to $9.26 billion ($6.17 billion). However, strong growth in invisibles during the quarter did not help contain the current account deficit arising on account of a steep surge in imports. Exports during the quarter amounted to $41.7 billion against $30.9 billion in the same period, a year ago. But imports during the quarter were even higher, amounting to $67 billion against $47.5 billion in the same period, a year ago. In the process, trade deficit ended up even wider at $25.3 billion ($16.5 billion).

In the capital account, foreign inflows through portfolio investment ended up being higher during the quarter. While net FDI inflows were higher at $3.6 billion ($3.1 billion), net portfolio investment went up steeply to $14.5 billion ($3.6 billion).

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