India’s balance of payments in 2008-09 captures the spread of the global crisis to India nicely. The current account deficit during 2008-09 shot up to 2.6 per cent of GDP from 1.5 per cent of GDP in 2007-08 (Table 1). And this is the highest level of current account deficit for India since 1990-91 (Chart 1). The capital account surplus dropped from a record high of 9.3 per cent of GDP in 2007-08 to 0.9 per cent of GDP. And this is lowest level of capital account surplus since 1981-82. The year ended with a decline in reserves of US$ 20.1 billion (inclusive of valuation changes) against a record rise in reserves of US$ 92.2 billion for 2007-08.

Source: Reserve Bank of India.

Source: Reserve Bank of India.

The global financial crisis began to affect India from early 2008 through a withdrawal of capital from India’s financial markets. This is shown in India’s balance of payments as a substantial decline in net capital inflows in the first half of 2008-09 to US$ 19 billion from US$ 51.4 billion in the first half of 2007-08, a 63 per cent decline. This is seen from a large outflow of portfolio investment (as equity disinvestment by foreign institutional investors); and lower external commercial borrowings, short-term trade credit, and short-term bank borrowings. Inflows under foreign direct investment, external assistance and NRI deposits, by contrast, surged during the first half of 2008-09.

In the second half of 2008-09, net capital flows turned negative as there were huge outflows of portfolio investment, short-term trade finance and banking capital.  Capital flows under foreign direct investment and external commercial borrowings recorded sharp declines of 66 per cent and 56 per cent respectively over the same period of 2007-08.  However, inflows under external assistance and NRI deposits continued to rise considerably during the second half of 2008-09.

While capital account suffered right from the beginning of 2008-09, the impact of the global crisis on the current account was felt only in the second half of 2008-09. In the first half of 2008-09, merchandise exports in fact grew strongly at 35 per cent and invisible receipts by 32 per cent. Merchandise imports grew by 45 per cent and invisible payments by 14 per cent in the first half of 2008-09. Net invisible earnings grew strongly at the rate of 51 per cent in the first half of 2008-09.  Things turned adverse dramatically in the second half of 2008-09 as global crisis took its toll on external trade.

Merchandise exports declined by about 18 per cent in the second half of 2008-09 over the same period of 2007-08, and imports declined by 11 per cent. Invisible receipts declined more sharply at 84 per cent and invisible payments by 13 per cent. As a result, net invisible receipts declined by 3 per cent in the second half of 2008-09 over the same period of 2007-08 in contrast a steep rise of 51 per cent in the first half of 2008-09.

The two major items of invisible receipts for India have been software exports and private transfers (remittances). Net receipts from software exports rose by 19 per cent in 2008-09 to US$ 44 billion from US$ 37 billion in 2007-08. Remittances also amounted to US$ 44 billion in 2008-09, a rise of 5 per cent from US$ 42 billion in 2007-08.

Table 2 brings out the slowdown or decline in various categories of invisible receipts in the second half of 2008-09.  As can be seen from Table 2, the growth in software exports slumped to 3.6 per cent in the second half of 2008-09 over the same period. Remittances in fact recorded a decline of 19.6 per cent in the second half of 2008-09.  These have to be seen in the context of a sharp growth of about 38 per cent in software exports and 40 per cent in remittances in the first half of 2008-09 over the same period in 2007-08.
 

Source: Reserve Bank of India.

The above analysis of India’s balance of payments has brought out that the global financial crisis severely hit the flow of capital into the country right from the beginning of 2008-09 and then subsequently the current account transactions (both trade and invisibles) in the second half of the year. This has led to one of the highest current account deficits and one of the lowest capital account surpluses for the country. The impact of the crisis on both capital flows and current receipts has been much larger than what we initially thought.

Mathew Joseph & Ritika Tewari