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International Trade and Finance

Notes worsened even more during 2008-09, when current account deficit shooted up to $ 28.7 billion, as
even much larger invisibles (net) receipt of $ 89.9 billion was not able to fill the huge trade deficit of
$ 118.6 billion. Defict in current account further shooted up to $ 38.4 billion in 2009-10 and $ 44.3 in
2010-11. Since it is customary to look upon the Chinese experience as a role model, it may be pointed
out that China had a current account surplus of 3.8 per cent of GDP in 1997 and has further improved
this surplus to 6.1 per cent of GDP in 2005.
Invisibles and Balance of Payments

India has achieved commendable success in its receipts from invisibles. As a consequence, surplus
from invisibles not only wiped out deficit in balance of trade, but also created a positive balance on
current account. For instance, in 2003-04, trade deficit was of the order $ 13.7 billion, but the surplus
from invisibles shot up to $ 27.8 billion. As a result, the balance of payment on current account
became positive to the extent of $ 14.1 billion.
It would be appropriate to study the components of invisible items so as to understand the importance
of various items. Table 4 provides data from 2000-01 to 2010-11. It may be observed that on the side
of receipts, among the services, the most important contribution is that of software services. But
transfers in form of remittance from Indians abroad provide the highest contribution to receipts.
Besides these two items, moderate contribution is also made by travel, transportation, investment
income and miscellaneous items. Economic Survey (2004-05) in this connection mentions : “The main
driver behind the current account surpluses, buoyant invisible flows, particularly private transfers
comprising remittances, along with software services exports, have been instrumental in creating
and sustaining current account surpluses for India.” As a consequence, invibles balance as a proportion
of GDP increased from 3.1 percent 2001-02 to 4.5 percent in 2004-05. This situation further improved
to 5.3 % of GDP in 2005-06 and 7.0 percent in 2009-10 but it declined to only 5.5 per cent in 2010-11.
This is a healthy development.
On the payments side, two items are prominent –Miscellaneous services and investment income.
These items accounted for over 73 percent of payments in 2003-04. In these two items, India shows a
net deficit in invisibles. There is a need for exercising caution in this regard, more especially in
continuous, unrestricted and sharp increase in foreign investment which generates a reverse flow in
the form of investment income.
If we study the net balance on invisibles in 2010-11, services accounted for 55.3 percent, transfers
accounted for 61.9 percent and investment income showed a net deficit of 17.2 percent.
It is vitally necessary to exercise caution regarding the warning signals in 2004-05. During 2004-05,
the trade deficit has shot up to $ 36.63 billion, while the invisibles surplus was $ 31.23 billion, thus a
deficit in current account has appeared again in 2004-05. The jubilation about the emergence of surplus
in current account surplus during 2002-03 and 2003-04 dried up and India was once again back to its
proverbial current account deficit. While the Commerce and Industry Minister has been feeling proud
of the achievement in high growth rates in exports, there was a total negligence on his part to realize
that the ground under his feet was being cut by a much sharper increase in imports. The situation has
worsened between 2005-06 and 2010-11 and current account defict shooted up to $ 44.3 billion by
2010-11.
Much of the relief in current account of balance of payment has been brought by net software exports,
which has increase from mere $ 355 million in 1997-98 to $ 43,224 million in 2010-11, but this trend
may taper off as China makes an inroad in the world software market. Similarly, remittances from
Indians may also grow at a lesser rate in future since they are reaching peak levels.
The purpose is not to paint a gloomy picture, but draw attention to the emerging dangers in the
external sector. The country has, therefore, to be vigilant about foreign payments account, as it has
been having only a one-legged policy in this area of boosting exports.

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