Spurt in 'Invisibles' contains BoP gap

Remittances from Indians abroad and to a lesser extent software exports together helped bring down the current account deficit (CAD) in 1999-2000 in spite of a substantial widening of the trade deficit, the latest statistics from the Reserve Bank of India show.

The RBI data, which have just been released, show that the CAD was slightly higher in absolute terms than in the year before (see Table). But going by the latest estimates of India's GDP in 1999-2000, the CAD was under one per cent of GDP last year, considerably lower than the estimate of 1.6 to 1.8 per cent made in the Economic Survey last February. Credit for this should go neither to more rapid export growth or a slow rise in imports but to a 40 per cent increase in receipts from 'Invisibles' - earnings from tourism, travel, remittances and software exports.

Throughout the Nineties, it has been the huge surplus in the 'Invisible' account that has bridged much of the gap in the current account and last year was no different.

The trade deficit in 1999-2000 widened by close to 30 per cent (details about exports and imports are not yet available), but the substantial growth in invisible earnings meant that a good 76 per cent of the trade gap was covered by invisible receipts (only 69 per cent in 1998-99).

The category of 'Private Transfers', comprising almost entirely remittances from expatriates, showed receipts of as much as $12.3 billion in 1999-2000 (19 per cent increase over 1998-99). The impact of software earnings is more difficult to discern because these are not classified separately, but are included in the ``Miscellaneous'' category of invisibles. Net earnings here rose from $1.3 billion in 1998-99 to as much as $3.2 billion last year - presumably largely on account of software exports which in turn received a boost from Y2K business. (Gross receipts and expenses were $10.1 billion and $6.9 billion last year in the 'Miscellaneous' category.) In outflows, investment income - mainly dividends, royalty, etc. - was $3.7 billion, roughly the same as in 1998-99.

The inflows in the capital account too increased last year from $8.6 billion to $10.2 billion.

The biggest component was foreign capital. But a change (an unhealthy one at that) was that foreign direct investment in 1999-2000 was much less than portfolio investment from abroad ($2.2 billion of FDI and $3 billion of portfolio investment) and was also less than the year before. In 1998-99, mainly because of the impact of the East Asian crisis, portfolio investment showed a small negative outflow while FDI was $2.5 billion.

The net effect of all these trends was that foreign exchange reserves increased in 1999-2000 by $6.1 billion as compared to a $3.8 billion in 1998-99.

CRR

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