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Economy: That invisible(s)’ touch… - Views on News from Equitymaster
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  • Dec 22, 2006

    Economy: That invisible(s)’ touch…

    In recent times, India's balance of payments position has been determined by the steady flow of invisible receipts, which have managed to finance a large part of the current account deficit. For this reason alone, the importance of 'invisibles' cannot be undermined. In this write-up, we shall examine the major factors contributing to the surge in invisible receipts.

    What are invisibles?
    The current account comprises of two components viz., merchandise (i.e. trade) account and invisibles (exports of services like software, and remittances from abroad). The former is concerned with the imports and exports of only goods. Whereas, invisibles have three major heads namely services, transfers and income. While services include receipts and payments with respect to travel, transportation and software, transfers include private transfers especially remittances from Indians residing abroad.

    Travel: Receipts under travel consist of expenditure made by foreign tourists towards hotel accommodation, food and beverages and goods and services purchased including domestic travel. Tourist inflow in India has gained momentum in the past few years. While global recession dented tourist arrivals in India in the 1990s, this trend has reversed in recent times. The impressive performance in tourist arrivals has been attributed to a strong sense of business and investment confidence in India led by growth of the Indian economy, strong performance of the domestic corporate sector and opening up of the economy to greater foreign participation.

    Software services: India's position as the preferred destination for software and IT related services has been reflected by the rise in software services exports to US$ 23.6 bn in FY06. This positive trend is expected to continue in the future as well. The key drivers to this growth have been India's low-cost base, good engineering and management talent, natural time zone advantages and global delivery capabilities.

    Transfers: The surge in the NRI remittances to India has been attributed largely to the oil boom in the Middle East during the 1970s and 1980s and the information technology boom in the 1990s, which witnessed a migration of workers to the Middle East and the US respectively. This has led to India becoming one of the highest remittances receiving country in the world. Remittances include repatriation of funds for family maintenance and local withdrawals from the NRI deposits. Inward remittances from Indians working abroad have reached US$ 24.6 bn in FY06 from US$ 2.1 bn in FY91 (Source: RBI). These remittances have stabilised at around 3% of GDP in the last few years and have played an instrumental role in offsetting India's trade deficit to a large extent.

    Private transfers to India
    Year Flows (US$ bn) % of GDP
    FY00 12.3 2.7
    FY01 13.1 2.8
    FY02 15.8 3.3
    FY03 17.2 3.4
    FY04 22.2 3.7
    FY05 21.1 3.0
    FY06 24.6 3.1
    Source: RBI

    To conclude…
    While invisibles have managed to stem the slide of the current account balance between FY02 and FY04, the same has not been the case in FY05 and FY06. In these two years, despite the invisibles charting an upward trend, the current account balance, nevertheless, slipped into the negative due to the burgeoning trade deficit (US$ 37.4 bn in FY06). The latter can be attributed to two factors viz. increase in both oil and non-oil imports and exports not able to keep pace with imports.

    One major factor contributing to the trade deficit has been the rise in crude prices, which given the fact that India imports around 70% of the oil that it consumes, continues to have an important bearing on the trade balance. The key here is exports. While invisibles will continue to play a key role in propping up the current account, India will have to step up its pace of exports, if gap has to narrow down. That said, despite a current account deficit, India's favourable BOP position and comfortable level of forex reserves means that the economy has come a long way since the kind of BOP crisis that emerged in the early 1990s.



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