Fix the deficit

Un­man­age­able cur­rent ac­count deficit is a cause for con­cern

Financial Chronicle - - EDIT, OPED, THE WORKS - my­mind@my­dig­i­

UN­MAN­AGE­ABLE cur­rent ac­count deficit (CAD) should be cause for worry for Arun Jait­ley and in­terim fi­nance min­is­ter Piyush Goyal ahead of the last full bud­get to be pre­sented even as prime min­is­ter Naren­dra Modi pre­pares to seek a sec­ond term in of­fice. There is no point in find­ing rea­sons to jus­tify the run­away CAD that is likely to touch $70 bil­lion and con­sti­tutes 2.4 per cent of GDP in the cur­rent fis­cal. This will be over $20 bil­lion more than $48.7 bil­lion re­ported a year be­fore. De­te­ri­o­ra­tion in CAD over the last four years would be a stick­ing point in the man­age­ment of cen­tral fi­nances. Given the grim sce­nario, top guns in the gov­ern­ment stopped talk­ing about wip­ing out the en­tire CAD that was just 0.4 per cent in 2014. The twin is­sues of high in­fla­tion and higher in­ter­est rates have been ex­ten­sively an­a­lysed. Now, the third macro-pa­ram­e­ter that stares in the face is bal­ance of pay­ments (BoP) and CAD get­ting out of hand.

Fi­nance Min­istry data re­leased on Wednesday does not pro­vide any so­lace given that in the fourth quar­ter of 2017-18 alone, CAD bal­looned to $13 bil­lion as against $2.8 bil­lion in same pe­riod in the pre­vi­ous year. This is more than the CAD re­ported for en­tire fis­cal 2016-17.

This year again, the num­bers may not look any bet­ter. Ex­pand­ing the trade deficit is eas­ily the big­gest fac­tor though firm­ing up of com­mod­ity prices have also con­trib­uted sub­stan­tially. Com­merce min­is­ter Suresh Prabhu may have to ex­plain the mas­sive 42 per cent growth in trade deficit at $160 bil­lion dur­ing 2017-18 visà-vis $112.4 bil­lion in the year-ago pe­riod. RBI data on the trade front in­di­cates that sur­pluses built in due to ser­vices ex­ports, in fact, saved the day for the Modi gov­ern­ment. Oth­er­wise, trade deficit would have only wors­ened.

Fix­ing mer­chan­dise trade co­nun­drum should be a pri­or­ity for the cen­tre. In­dia seems to have had very lim­ited suc­cess in ex­ploit­ing new mar­kets, re­tain­ing its share in tra­di­tional ge­ogra­phies and at­tempt­ing fresh strate­gies. Trade wars be­tween ma­jor pow­ers and cur­rency volatil­ity have only wors­ened the sit­u­a­tion for In­dia. Mod­er­a­tion in net for­eign di­rect in­vest­ments (FDI) at $30.3 bil­lion in 2017-18 as against $35.6 bil­lion in the pre­vi­ous year is yet again a fac­tor to be flagged. How­ever, three times growth in for­eign port­fo­lio in­vest­ments at $22.1 bil­lion as against $7.6 bil­lion in the pre­vi­ous year seems to have been largely made up lower net FDI.

Crude prices have played out in bring­ing about an el­e­ment of un­cer­tainty to ex­ter­nal fi­nances. If the In­dian crude bas­ket price av­er­ages $75 as es­ti­mated vis-a-vis $56 per bar­rel last fis­cal, then the oil im­port bill would touch $100 bil­lion in 201819 as against $71.1 bil­lion in the pre­vi­ous year. An 8 per cent growth in oil im­ports may also have to be fac­tored in.

It is in this con­text that In­dia’s of­fer to tango with China to form an oil buy­ers’ club as­sumes sig­nif­i­cance. With China join­ing hands with In­dia, two ma­jor oil con­sumers in Asia will im­prove the pric­ing terms from the 14-mem­ber Or­ga­ni­za­tion of Petroleum Ex­port­ing Coun­tries (OPEC) that cur­rently dom­i­nates the crude mar­ket. It will also help the US counter the OPEC’s dom­i­nance.

Min­is­ter of Petroleum and Nat­u­ral Gas Dhar­men­dra Prad­han seems to have only dusted up a decade-old pro­posal of then petroleum min­is­ter Mani Shanker Aiyer while seek­ing to form an al­liance of oil con­sumers glob­ally. Modi-Jait­ley-Goyal will have to de­vise a re­worked strat­egy to man­age CAD. Over­com­ing dif­fer­ences with the US on du­ties re­lat­ing to steel ex­ports could be the start­ing point. Im­prov­ing mer­chan­dise ex­ports con­tri­bu­tion to the gov­ern­ment’s kitty needs to be ex­plored fur­ther. RBI may have to step in if the swing in ru­pee value does not stop quickly. The per­sonal rap­port with Chi­nese Pres­i­dent Xi Jin­ping may have to be lever­aged by Modi to quickly form the oil buy­ers club. Apart from that, cut­ting down on non-es­sen­tial non-oil and oil im­ports can­not be avoided.

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