Cur­rent ac­count deficit hits four-year high

The New Indian Express - - FRONT PAGE -

IN­DIA’S Cur­rent Ac­count Deficit (CAD), one of the key eco­nomic met­rics, is blink­ing red. At $14.3 bn, or 2.4 per cent of the GDP in first quar­ter of the cur­rent fis­cal, CAD surged to a four-year high, dous­ing at­tempts to main­tain trade deficit at a peace­time record of 0.7 per cent of the GDP in FY17.

Ris­ing gold im­ports and ru­pee ap­pre­ci­a­tion that drove non-oil, non-gold im­ports higher rel­a­tive to ex­ports, widened the mer­chan­dise trade deficit to $41.2 bn, ac­cord­ing to RBI. The data is dis­ap­point­ing for the gov­ern­ment, which is fac­ing pres­sure from fall­ing ex­ports. The good news though is, the ris­ing deficit doesn’t in­di­cate we are liv­ing out­side our means.

Forex re­serves crossed the $400 bn-mark for the first time early this month, strength­en­ing cap­i­tal buf­fers. It means, ex­clud­ing gold re­serves, we have suf­fi­cient re­serves, $376 bn to be pre­cise, to pay for a year of im­ports. “We ex­pect FY18 deficit to dou­ble to around $30-32 bn (1.21.3 per cent of GDP). Nev­er­the­less, this should be ad­e­quately fi­nanced through a re­sump­tion in NRI de­posits and FDI and FII in­flows,” said Aditi Na­yar, prin­ci­pal econ­o­mist, ICRA Ltd.

Typ­i­cally, trade deficit oc­curs when im­ports ex­ceed ex­ports or other com­po­nents like net in­come, in­ter­est and div­i­dends on for­eign trans­ac­tions gy­rate. The 15 per cent hike in ser­vices trade sur­plus, mod­est in­crease in sec­ondary in­come in­flows and de­cline in pri­mary in­come out­flows pre­vented CAD from a larger de­te­ri­o­ra­tion. But ex­perts warn, high im­ports could weaken ru­pee, sap liq­uid­ity, turn away for­eign in­vestors, and slow down de­mand like it did when deficit bal­looned to 4.8 per cent in FY14. A mix of good pol­icy (im­port tar­iffs on gold and ex­port pro­mo­tion) and good luck (fall­ing crude prices) helped in a turn­around with CAD set­tling at an un­be­liev­able 0.7 per cent in FY17.

Net port­fo­lio in­vest­ment recorded sub­stan­tial in­flows of $12.5 bil­lion in first quar­ter, pri­mar­ily in the debt seg­ment com­pared to $2.1 bn, same pe­riod last year. But net re­ceipts on ac­count of non-res­i­dent de­posits ag­gre­gated $1.2 bn in Q1’18, lower than $1.4 bn last year.

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