The current account deficit as a percentage of gross domestic product improved year on year, but deteriorated on a sequential basis.
Shishir Asthana
India’s current account deficit (CAD) widened to $15.8 billion in the quarter ended June from $15 billion a year ago. However, as a percentage of the gross domestic product (GDP), the current account deficit has improved to 2.4 percent from 2.5 percent in the previous year. The improvement is simply because of a faster growth in the economy. This is perhaps the only bit of good news from the balance of payments (BoP) data.
Current account deficit is the measure of a country's trade where the value of imported goods and services exceeds the value of exports.
On a sequential basis, the CAD/GDP ratio has deteriorated from 1.9 percent in the final quarter of FY18.
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Here are five scary data points:
1. In absolute terms, CAD has touched a five-year high of $15.8 billion. The higher CAD was primarily on account of a higher trade deficit at $45.7 billion as compared with $41.9 billion a year ago.
2. The rise in the trade deficit was thanks to increasing crude oil prices and a falling rupee. The oil import bill jumped to a 14-quarter high of $22.6 billion up from $16.6 billion a year ago. But for a sharp jump in private transfer receipts, mainly remittances, which amounted to $18.8 billion, the numbers would have been more depressing.
3. India is unable to grow exports despite decent growth in the global economy which is adding to the balance of payment crisis. RBI’s ban on banks issuing letters of undertaking (LoUs) has also affected short-term trade credit, which was the main source of export funding and has resulted in a short-term outflow of $3.5 billion.
4. In order to support the falling rupee, the central bank is using its foreign exchange reserves. RBI data shows that in the first quarter of 2018-19, there was a depletion of $11.3 billion of forex reserves (on BoP basis) compared to an accretion of $11.4 billion in the same quarter a year ago. This is the largest drawdown in six years. Forex reserves now cover just about 10 months of imports, the lowest in three years.
5. Thanks to tightening in global financial conditions, India’s capital inflows fell to a nine-quarter low of $5.2 billion in the first quarter compared to $26.9 billion in the first quarter of the previous year. Note that the inflows were an average of $22.8 billion every quarter during FY18. RBI data shows that on account of net sales in both the debt and equity markets, foreign portfolio investment recorded a net outflow of $8.1 billion in the first quarter of FY19 compared with an inflow of $12.5 billion during the same period a year ago.
Rising interest rates in the US, soaring oil prices and a falling rupee which has gained the unenviable distinction of being Asia’s worst performing currency, are all adding pressure to the BoP situation. Expect the current account deficit to worsen over the rest of the year.