India : Surprise current account deficit on slower remittances

MUMBAI India unexpectedly posted a slight current account deficit in the April-June quarter, contrasting with expectations it would post the first surplus in nine years, as citizens abroad sent fewer remittances home.

Reserve Bank of India (RBI) data on Wednesday showed India posted a current account deficit of $ 300 million, or 0.1 percent of gross domestic product, in the period. It compared with expectations for a $ 4 billion surplus that would have been the first positive balance since the first three months of 2007.

The deficit, however, was much narrower than the $ 6.1 billion, or 1.2 percent of GDP, in the same quarter a year ago.

India has a large number of citizens who work abroad, but what they have been able to send home has fallen due to an economic slowdown in popular work destinations such as the Middle East.

Private transfer receipts, which reflect remittances, fell to $ 15.2 billion in April-June versus $ 16.3 billion a year ago, according to the RBI data.

“Going ahead we expect the remittances from Indians mostly staying in the Middle East countries to remain sluggish, which means the current account deficit for the full fiscal year is likely to be nearly one percent and not below one percent of GDP as earlier expected,” said A. Prasanna, economist at ICICI Securities Primary Dealership.

A current account deficit of below 1 percent of GDP would still be well below the record high of 4.8 percent of GDP hit in the year ending in March 2013.

But analysts say the current account gap could signal trouble spots in an economy that may be growing at among the fastest pace in the world but is still expanding well below the 8 percent needed to provide full employment.

That is because positive factors such as continued solid inflows into stocks and debt markets – which surged to $ 2.1 billion from $ 200 million a year ago – are being offset as weak investment demand hits imports, while exports remain sluggish because of slowing global demand.

The data on Wednesday showed imports slumped in the April-June quarter, even as exports stayed subdued, narrowing the trade deficit to $ 23.8 billion from $ 34.2 billion a year ago.

For a developing economy like India slow import growth is a negative sign, as it reflects weak investment demand because Indian firms need to buy capital goods and machinery from abroad.

Meanwhile, India’s overall balance of payment surplus narrowed to $ 7.0 billion from $ 11.4 billion a year ago, according to the RBI, though it still marked a third straight quarter of surplus.