Mar 24, 2017 Lower commodity prices, especially of oil and gold, have played a big role in pulling down India’s current account deficit (CAD). If contribution of oil and gold is removed, then India’s current account deficit (CAD) has actually worsened in last few years, according to an IIFL report.
“A lot of credit for achieving macro stability is attributable to ‘luck’ rather than the policy makers,” says the report.
Oil and gold have seen a decline in prices, which is a positive for the nation’s CAD. But, if you remove these then the CAD would have been considerably lower.
India’s overall CAD has fallen to average estimate of 1 percent of gross domestic product in FY16-17 from 4.6 percent in FY12-13. CAD, which was in surplus of 3 percent in FY12-13, would only be an estimated surplus of about 2 percent on FY16-17, if gold and oil are removed.
“In FY17, India’s current account surplus, excluding oil and gold, will be the lowest in over a decade,” according to the report.
In the December quarter of current fiscal, CAD jumped to a 1.4 percent of GDP from 0.6 percent in September quarter as the gap between imports and exports widened.
This widening can be attributed to gold imports, which stood at USD 1.9 billion at a five-quarter high.
IIFL believes deterioration is primarily due to fall in invisible surplus or remittances to 5 percent of GDP in FY16-17 from 6 percent earlier in FY12-13.
This fall can be structural. IIFL has listed two key reasons: one, is slowdown in economic activity in Middle East and second, the issues in IT sector where both exports and remittances is high.
Net remittances to India fell by 8.9 percent year-on-year in the December quarter, marking a decline for the seventh month in row. Outlook for remittances is likely to remain weak as the oil prices are unlikely to shoot up.
This also means that India’s vulnerability to sharp uptick in commodity prices has increased. “A widening of merchandise deficit in the next few years would push up CAD.”
Analysts expect CAD to worsen further in FY18. It is expected to deteriorate to 1.7 percent of GDP next fiscal on back of ‘higher merchandise trade deficit and a continued weakness in remittance’, according to Religare.
“We expect the Q4FY17 CAD to deteriorate YoY as savings in net oil trade dissipate due to the low base effect (average oil prices in Q4FY16: USD 33/bbl) while remittances and service exports continue to decline. We expect the full-year FY17 CAD number to come in at 0.9% of GDP (FY16: 1.1%),” Religare says.
Similar to CAD, India’s fiscal deficit too has actually fallen if one removes benefit of low oil prices. It also masks deterioration of state finances.
“The overall improvement in the fisc masks a marked deterioration in state finances, a trend that is likely to continue in the next financial year as well,” IIFL says.