Q2 trade data suggests $5bn CAD, FIIs are still key
Currrent account data from RBI, headline-grabbing as it is, has largely become an exercise in rear-window economics—it tells you what happened in the past, but is completely useless to help tell you what to do in the future. The high CAD of 4.9% of GDP in Q1FY14, up from 3.6% in the quarter before, suggests it is time to put more import curbs. Imports, however, have so dramatically compressed in July and August—the first 2 months of Q2FY14—in keeping with the collapsing economy, any further compression is not called for. From an average of $14 billion per month in Q1FY13 to $17bn in Q2 to $19billion in Q3, the trade deficit fell to $15bn in Q4FY13, then rose to $17 billion per month in Q1FY14—the period for which RBI has just put out data. In July and August, however, this number is down to an average of $11.5 billion. Even assuming a similar number for September, we are looking at a Q2FY14 trade deficit that is around $16 billion lower than that for Q1. And that’s assuming a flat services growth which the July data suggests may not necessarily be correct, and Q2 services exports could well be up a billion or two. But even if you ignore that, Q2 CAD can’t be more than $5-6 billion. Given that there is a possibility gold imports could rise again in the festive season (Q3), this needs to be factored in. But with the first half CAD likely to be around $28 billion, the full year’s CAD is going to be much lower than the $70 billion projected by the finance ministry some months ago—a number of $55-60 billion looks a lot more likely even accounting for a surge in gold imports.
All of which suggests the finance ministry got it right on the crisis-spiral that most observers, including this newspaper, were talking of even a month ago. Financing the deficit still requires India to gets its policies right, but certainly the numbers are less daunting now, more so since the US taper has been put off by at least a quarter. FIIs, for instance, brought in inflows of $7.9 billion in Q2FY13, $9.9 billion in Q3 and $11.5 billion in Q4 but this fell to a negative $500 million in Q1FY14—data for Q2FY14 suggests a negative $4 billion. Whether this is positive or negative in the second half of the year depends on how FIIs look at Indian policies. FDI has broadly been on track—$6.5 billion in the June quarter as compared to $5.7 billion in the March quarter – but as with FII, this depends critically on government policy. Commercial borrowings, up from $2.8 billion in Q3FY13 to $4.2 billion in Q4FY13, collapsed to a mere $900 million in Q1FY14, suggesting a potential stress area. RBI’s late night restrictions on refinancing ECBs at higher rates will crimp this further. Short-term credit is also down from $4.5 billion in Q4FY13 to $2.5 billion in Q1FY14. What has made up for this is ‘banking capital’, a sharp $13.7 billion swing from Q4FY13 to Q1FY14 – while this may not endure, NRI deposits which are a part of this are up $3 billion in Q1FY14 and are likely to rise further with the RBI’s swap facility. In other words, the CAD looks a lot better but a let up in recent reform moves, or an increase in the anti-reform moves, could still trigger a financing problem.