Current account deficit hits four-year high
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.