What’s in Today’s Article?
- Definition of Key Economic Terms
- Background (Context of the Article)
- Key Factors Contribution to the Deficit (Trade Deficit, Transfer Receipts, etc.)
Definition of Key Economic Terms:
- Current Account Deficit (CAD): The current account deficit occurs when a country's total imports of goods, services, and transfers exceed its total exports. It represents a negative balance of trade and reflects the extent to which a nation is borrowing or using its foreign reserves to finance its spending.
- Gross Domestic Product (GDP): GDP is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. It is a broad measure of overall domestic production.
- Merchandise Trade Deficit: A trade deficit occurs when a country’s imports exceed its exports of goods (or merchandise). The merchandise trade balance specifically refers to the balance of physical goods traded internationally.
- Net Services Receipts: These are the earnings a country receives from its services sector (e.g., IT services, transportation, travel) minus the payments it makes for services imported from abroad.
- Private Transfer Receipts: These represent the remittances sent by individuals working abroad to their home country. They are an important source of foreign exchange inflows for many developing countries.
- Primary Income Account: This account in the balance of payments reflects income flows between residents and non-residents, such as dividends, interest, and wages. A net outflow means that more payments were made abroad than received.
- Foreign Direct Investment (FDI): FDI refers to the investments made by a foreign entity or individual into the business assets of another country, typically in the form of ownership stakes in companies, real estate, or infrastructure.
- Foreign Portfolio Investment (FPI): FPI refers to investment in financial assets, such as stocks and bonds, in another country without the intention of controlling the company. It is generally more short-term and volatile compared to FDI.
- External Commercial Borrowings (ECBs): ECBs are loans or borrowings made by a country or its corporations from non-resident lenders in foreign currencies.
- Non-Resident Indian (NRI) Deposits: These are deposits made by Indians living abroad into accounts in India, often benefiting from favorable interest rates and contributing to the country's foreign exchange reserves.
- Foreign Exchange Reserves: These are assets held by a central bank in foreign currencies, which can include bonds, treasury bills, and other government securities. They are used to back liabilities and influence monetary policy.
Background:
- India’s current account deficit (CAD) expanded marginally in the first quarter of the fiscal year 2024-25 (Q1 FY25).
- According to the data released by the Reserve Bank of India (RBI) recently, the CAD reached $9.7 billion, which is equivalent to 1.1% of the country's Gross Domestic Product (GDP).
- This marks an increase from $8.9 billion (1.0% of GDP) during the same period in the previous year, Q1 FY24.
- Furthermore, it represents a stark contrast to the surplus of $4.6 billion (0.5% of GDP) recorded in the fourth quarter of FY24 (Q4 FY24).
Key Factors Contributing to the Deficit:
- Merchandise Trade Deficit:
- One of the primary reasons for the widening of the CAD is the increase in the merchandise trade deficit.
- The trade deficit, which is the difference between the value of a country’s imports and exports, grew to $65.1 billion in Q1 FY25, compared to $56.7 billion in Q1 FY24.
- The growth in imports, particularly in sectors such as oil, gold, and other non-oil products, was a significant contributor to this phenomenon.
- Services and Private Transfer Receipts:
- On a positive note, India's net services receipts improved year-on-year (y-o-y) from $35.1 billion in Q1 FY24 to $39.7 billion in Q1 FY25.
- This rise was seen across major service categories, including:
- Computer services
- Business services
- Travel services
- Transportation services
- Additionally, private transfer receipts, primarily remittances from Indians working overseas, increased from $27.1 billion in Q1 FY24 to $29.5 billion in Q1 FY25, reflecting the continued growth in inflows from expatriates.
- Primary Income Account:
- The net outgo on the primary income account, which mainly represents payments of investment income, increased slightly from $10.2 billion in Q1 FY24 to $10.7 billion in Q1 FY25.
- This reflects the payments made on returns to foreign investments in India.
Financial Account:
- In terms of the financial account, the data presented several shifts:
- Foreign Direct Investment (FDI): Net FDI inflows rose to $6.3 billion in Q1 FY25, up from $4.7 billion in Q1 FY24, indicating continued investor confidence in India.
- Foreign Portfolio Investment (FPI): On the other hand, net inflows under FPI decreased significantly from $15.7 billion in Q1 FY24 to just $0.9 billion in Q1 FY25.
- External Commercial Borrowings (ECBs): ECBs also saw a decline, with net inflows falling from $5.6 billion in Q1 FY24 to $1.8 billion in Q1 FY25.
- Non-Resident Indian (NRI) Deposits: Net inflows from NRI deposits were higher, reaching $4.0 billion in Q1 FY25 compared to $2.2 billion in the same period last year.
- Foreign Exchange Reserves: India's foreign exchange reserves increased by $5.2 billion in Q1 FY25 on a Balance of Payments (BoP) basis. However, this was a substantial decline from the $24.4 billion accretion seen in Q1 FY24.
Expert Commentary:
- As per experts, the overall balance of payments situation remained largely stable for Q1 FY25.
- As per them, the $5.2 billion net accretion to foreign exchange reserves as a positive, although it was lower than the $24.4 billion in the previous year.
- Both oil and gold imports contributed to the widening trade deficit, along with other non-oil imports.
- They said that while the CAD at 1.1% of GDP was higher than last year’s 1%, it was still within a comfortable range.
