Thursday, 10 Oct, 2024
By: Yash Gupte
India recorded a current account deficit (CAD) of 1.2 percent of GDP in 2021-22 against a surplus of 0.9 percent in 2020-21. Image source: IANS
Although, India’s high foreign exchange reserves provides enough cushioning to balance the negatives, it’s important that the government takes remedial steps to arrest the growing imbalances
A burgeoning import bill, declining exports, and a depreciating rupee are all weighing down India’s foreign trade finances. As a result, both the trade and current account deficits, have widened sharply indicating towards a balance-of- payments deficit which could linger for the foreseeable future.
Although, India’s high foreign exchange reserves provides enough cushioning to balance the negatives, it’s important that the government takes remedial steps to arrest the growing imbalances.
According to the latest data released by the Ministry of Commerce, exports dropped below the crucial $30-billion mark for the first time since March 2021 to hit $29.8 billion. Exports declined by eight percent compared to September 2022 when it was $32.2 billion. It was in November 2020 when exports had contracted last time, by 8.74 per cent. Imports, however, rose 5.7 percent, to $56.7 billion.
Consequently, trade deficit inched up to $26.9 billion in October from $25.7 billion in the previous month. The trade deficit has remained above the $25-billion mark for a fifth straight month. As the above chart shows, apart from a small blip in March and September, the trade deficit has been rising persistently in 2022. It was USD 17.94 billion in January and jumped to $31 billion in July.
Ballooning CAD
Current account balance is the difference between what a country pays and what it is paid in exchange for goods and services. A country is said to be facing a current account deficit when its import bill is higher than its export bill, and is said to be in surplus when its exports exceed imports. India typically runs a current account deficit as it is a developing economy which relies on imports of several commodities like crude oil.
According to experts, current account deficit of around 2.5-to-3 percent of the gross domestic product is said to be sustainable. This was easily maintained before as the export-import gap remained well within the limit. As the accompanying chart shows, the country saw a rare current account surplus in FY2020-21, it slipped back into deficit in FY 2021-22.
India recorded a current account deficit (CAD) of 1.2 percent of GDP in 2021-22 against a surplus of 0.9 percent in 2020-21. In the January-March 2022 quarter, the CAD narrowed on a sequential basis to $13.4 billion, or 1.5 percent of GDP, against $22.2 billion, or 2.6 percent of GDP, in the December 2021 quarter.
However, according to the latest RBI data, CAD has again jumped to $23.8 billion by the quarter ending June 2022 — the highest in the past decade in absolute terms, and comparable only to the third quarter of FY 2012-13 when it had surged to Rs $32.6 billion or 6.75 per cent of India’s GDP in that quarter.
What are the projections?
According to the ministry, CAD is expected to deteriorate in 2022-23 if recession concerns do not lead to a sustained and meaningful reduction in the prices of food and energy commodities to remain between 3.3 percent to 3.9 percent of GDP. RBI estimates it to stay within 3 percent of the GDP. The central bank in its September bulletin has put its weight behind the India’s export performance, return of portfolio flows and sustained increase in foreign direct investment. It also predicted that the country will achieve the export target of $750 billion for goods and services for 2022-23.
However, economic think-tank Centre for Monitoring Indian Economy has predicted CAD at 5.6 percent. If this happens, this would be the highest CAD-to-GDP ratio in a decade. According to CMIE, the widening of CAD will be solely led by an expansion in merchandise trade deficit.
Projections by the Investment Information and Credit Rating Agency of India (ICRA), an arm of Moody’s Investors Service, suggest that CAD may enter the $35-40 billion (Rs 2.8-3.2 lakh crore) territory by the July-September quarter (second quarter) of the current fiscal year. The ratings agency also projects that, based on the GDP performance, CAD could be 4.2-4.8 per cent of India’s GDP in the same quarter. The International Monetary Fund (IMF), meanwhile, projects that India’s average CAD will swell to 3.5 per cent in 2022.
However, not everything is gloomy. Experts believe that India's growth prospects remain relatively optimistic when compared to the world. Foreign reserves are at a historic high even after a massive decline (India’s foreign exchange reserves remain elevated at $533 billion—a respectable 8.6 months of goods import cover—even after a fall of about $100 billion since the start of the year). The combination of factors would suggest that the Indian current account deficit is sustainable for now.
