Prime Minister of India - Dr. Manmohan Singh

EAC Report to PM on balance of Payments Outlook

- At 2.9% of GDP, current account deficit still in "comfort zone".

- Invisibles buoyant. Positive capital flows bridge trade deficit and add to forex reserves.

- Defence imports may have contributed to higher CAD

The Prime Minister's Economic Advisory Council presented a report on Balance of Payments to the Prime Minister. According to the Report:

1. The current account deficit (CAD) for 2005/06 is projected at 2.9% of GDP. While it is appropriate for an economy of our size with vast investment needs to be running a CAD, its size and composition warrant continuous monitoring. At almost 3% of GDP, the CAD may still be in the comfort zone provided it goes to finance productive investment.

2. There is a growing divergence between the trade data as reported by RBI and as compiled by DGCIS. During the current year, trade deficit under the DGCIS data is projected at 5.2% of GDP vis-�-vis 7.7% under the BoP 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% of GDP whereas it goes up under the RBI data to 2.9% of GDP. The divergence, particularly in import figures, may be due to one off payments for defence and civilian aircraft imports. It may be useful to be as transparent as possible in the published data in the public domain so as to manage expectations on the BoP outlook which is important to inspire the trust and confidence of potential investors, both domestic and foreign.

3. Invisibles continue to be buoyant. The larger estimated outflow under investment income this year compared to last year, partly owing to the payout of accumulated interest on India Millennium Deposits in December 2005, will be more than offset by increases in software exports and remittances. Indeed, net invisibles are projected to increase from 4.5% of GDP last year to 4.8% of GDP this year.

4. As a proportion of GDP, capital flows are slated to decline marginally from 4.5% to 4.1% 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 on top of that as net accretion to reserves.