New RBI data on India’s BOP for 2017-18

Balance of Payment for 2017-18 show current account deficit (CAD) at $48.72 billion, the highest since record $88.16 billion of 2012-13.

India’s forex reserves, at $424.55 billion as on March 2018, are actually eighth largest in the world

Countries generally accumulate reserves by exporting more than what they import. IMF data on the current account balances of the top 10 forex reserves holders reveal all of them – barring India and Brazil– to have been running surpluses year after year.

India has always had deficits on its merchandise trade account, with the value of its imports of goods far in excess of that of exports. At the same time, the country has traditionally enjoyed surplus on its ‘invisible account’. Invisible basically cover receipts from exports of software services, inward remittances by migrant workers, and tourism and – on the other side- payment to wards interest, dividend and royalty on foreign loans, investments and technology/brands, besides on banking, insurance and shipping services.

But with the invisibles surpluses not exceeding trade deficits – except during the three year from 2001-02 to 2003-04- it has resulted in the country consistently registering CADs (current account deficits).

Is this model sustainable?

India and Brazil represent unique cases of economies that have built reserves largely on the strength of their capital rather than current account of BoP. India is even more unique because its currency, unlike the Brazilian real, is relatively stable, and not under frequent speculative attacks. In theory, a country can keep capital flows to fund CADs so long as its growth prospects are seen to be good, and investment environment is equally welcoming. It would help, though, if such foreign investment also goes towards augmenting the economy’s manufacturing and services export capacities, as opposed to simply producing or even importing for the domestic market. In the long run, that can help narrow the CAD to more sustainable levels.

Source : Indian Express

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