India's current account deficit projected at 2.9 percent

India's current account deficit (CAD) for 2005-06 is projected at 2.9 percent of Gross Domestic Product (GDP), according to a report on balance of payments (BoP) presented to Prime Minister's office by the Economic Advisory Council in New Delhi Wednesday.

At almost 3 percent of GDP, the CAD may still be in the comfort zone provided it goes to finance productive investment, the reports says.

The report says that while it is appropriate for an economy of India's size with vast investment needs to be running a CAD, its size and composition warrant continuous monitoring.

However, there is a growing divergence between the trade data as reported by Reserve Bank of India (RBI) and as compiled by Directorate General of Commercial Intelligence and Statistics ( DGCIS).

Trade deficit under the DGCIS data is projected at 5.2 percent of GDP vis--vis 7.7 percent under the RBI data thereby widening the divergence to 2.5 percentage points of GDP.

This results in a corresponding divergence in the CAD as well.

If the CAD is calculated using the DGCIS trade data, it would amount to only 0.3 percent of GDP whereas it goes up under the RBI data to 2.9 percent of GDP.

The divergence, particularly in import figures, may be due to one off payments for defense and civilian aircraft imports, the report says.

Invisibles continue to be buoyant. The larger estimated outflow under investment income this year compared to last year, will be more than offset by increases in software exports and remittances. Indeed, net invisibles are projected to increase from 4.5 percent of GDP last year to 4.8 percent of GDP this year.

As a proportion of GDP, capital flows are slated to decline marginally from 4.5 percent to 4.1 percent of GDP. Nevertheless, they are likely to be large enough in 2005-06 to fully bridge the current account deficit and leave a margin of 10.7 billion US dollars on top of that as net accretion to reserves.

The divergence between DGCIS data and RBI data is not uniform but shows variations across years.

Source: Xinhua