Crisil Research has cut its forecast for current account deficit this financial year to $32 bln, or 1.55 of GDP, from $47 bln, or 2.2% of GDP, due to the sudden fall in oil prices.
A country’s dealings with the rest of the world is divided into the current account and the capital account. Current account is ‘unencumbered cash’ that flows into the country, while ‘capital account’ reflects cash that is invested into the country and whose ownership continues to reside outside.
India imports more goods than it exports, and runs a current account deficit.
However, exempting oil imports, India could actually post current account surpluses. And oil prices have been falling, encouraging CRISIL Research to revise its CAD estimate.
“CRISIL Research now expects oil prices to average $100 per barrel in 2014-15 as compared to the earlier forecast of $105 per barrel,” it said. “Oil imports constitute nearly one third of India’s total merchandise imports. Therefore, lower oil prices will significantly bring down total imports. With the Fed tapering nearing its end, any increase in interest rates in the US could trigger capital withdrawals from emerging economies including India. To reduce India’s vulnerability to any such external shocks we believe that the government is likely to continue with import curbs on gold restrictions, which creates downside to our earlier forecast of gold imports.”
For the latest month of September, India’s goods trade deficit widened to $14.2 billion from $10.8 billion in the previous month.
The trade deficit for second quarter (July-September) stood at $37.3 billion compared to $29.3 billion a year ago and compared to $33.1 billion in the first of quarter of this fiscal (April-June). Accounting for the trade surplus in services ($17.8 billion in Q2) and assuming that remittances and investment incomes remain unchanged from last quarter, current account deficit (CAD) is set to widen to around $10 billion in Q2 from $7.8 billion in Q1.
“The widening is due to higher core (non-oil non-gold) imports, reflecting a gradual revival domestic demand. At $ 10 billion, CAD will be almost twice the levels seen a year ago (July-September 2013). The pick-up in trade deficit is mostly due to higher non-oil imports compared last year (Figure 2). During July-September 2013, gold imports had fallen sharply in a knee-jerk response to import curbs, which included a hike in gold import duty to 10% and a mandatory requirement that 20% of all gold imports be kept aside for exports. Imports of capital and consumption goods (non-oil non gold imports) too, have risen significantly (around 10% growth) compared to Q2 fiscal 2014, signaling a recovery in domestic demand from last year’s lows,” it said.
Despite an over $10 per barrel decline in crude oil prices, oil imports rose by 9.7% due to higher import volumes in September.
Non-oil imports also grew by staggering 36.2% y-o-y in September due to both higher gold and well as higher core (non-oil non-gold) imports.
Gold imports increased to $3.75 billion September – the highest monthly imports since curbs were imposed last August. Higher demand spurred by the upcoming festive season and low prices is likely to have led to the rise in imports of the yellow metal.
Mirroring domestic economic recovery, core (non-oil non-gold) imports also trended upwards for the fifth consecutive month – and much more sharply this time – growing at 22.3% y-o-y in September, up from 8.2% y-o-y in August, the research agency said.
With core imports expected to pick up with economic recovery, exports need to raise its growth momentum in coming months to keep merchandise trade deficit in check.
“The slowdown in exports was driven by a sharp decline in exports of petroleum products (13.3% y-o-y, fall) and electronic goods (17.4% y-o-y fall). These two sectors together account around one-quarter of India’s merchandise exports. In contrast, exports of engineering goods and ready-made garments continued to show robust growth at 20.2% and 15.9% respectively, in September.”
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