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Economy in Brief

India Balance of Payments Sees Dynamic Trade and Investment Flows, with Record Reserve Accumulation in 2006
by Carol Stone April 4, 2007

India's balance of payments shows an unusual amount of two-way flow in both current and financial accounts. In Q4 2006 this encompassed a variety of distinctive movements. The trade deficit widened, continuing to confound many observers' preconceptions that India shouldn't have a deficit in this account at all. Petroleum is apparently the main cause, as suggested by the second graph here. It shows merchandise imports less petroleum plotted with merchandise exports, and these two quantities have roughly the same magnitudes.

The overall current account is much more near balance, as sizable surpluses in services and unilateral transfers offset much of the trade shortfall. In fact, the net on services in Q4, right at $9.0 billion, is nearly twice as much as it was in Q4 of 2005. This is the numerical result of the "outsourcing" of many business service activities by companies elsewhere in the world. Many Indians work abroad and send money home. Private transfers in Q4 were $7.9 billion, up $1.5 billion from the same period a year ago. The balances on services and transfers were both record amounts.

Capital accounts feature sizable -- unprecedented -- direct investment flows in BOTH directions. Foreign firms acquired Indian companies and Indian companies made acquisitions abroad. Foreign investors also increased their portfolio holdings, as they bought into the Indian stock market. Other capital account transactions, including bank loans and bank deposits and assorted other kinds of lending also showed great fluidity: Indian banks made sizable loans abroad, while nonbank lending to India grew sharply.

All together, the "overall balance" in Q4 was $7.5 billion, with a commensurate increase in foreign exchange reserves. This is sizable, and such numbers are getting to be common. For 2006 as a whole, the balance totaled $29.4 billion, also a record. Such accumulations of foreign exchange will enable more flows abroad, such as the outward investments recently seen.

Haver's data on India is contained in the EMERGEPR database.

INDIA1: Mil.US$ Q4 2006 Q3 2006 Q4 2005 2006 2005 2004
Current Account2,3 -1,321 -2,465 -3,549 -10,006 -7,810 +781
Merchandise Trade2 -18,251 -14,346 -12,400 -63,783 -46,872 -28,036
Services2 +8,995 +7,650 +4,643 +31,428 +22,259 +13,076
Transfers2 +8,282 +5,503 +6,631 +26,290 +23,234 +19,793
Direct Investment in India +8,669 +3,414 +2,002 +16,888 +6,663 +5,771
Direct Investment Abroad -6,388 -1,146 -784 -9,029 -2,487 -2,179
Portfolio Investment +3,556 +2,141 +2,748 +9,503 +12,144 +9,037
Overall Balance3 +7,507 +2,268 -4,672 +29,372 +14,460 +23,601
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