Data Focus: Widening CAD may not be an immediate cause of worry

External factors coupled with higher domestic demand has begun to put pressure on India’s current account deficit, which is expected to widen further, but it may not be an immediate cause of worry.

The current account deficit had touched a record of 4.8 per cent of GDP in 2012-13 on the back of rising gold and oil imports. Experts point out that as long as it remains in the range of 2.5 per cent to 3 per cent of the GDP, it is not a cause of concern.

Reserve Bank of India Deputy Governor Michael Patra had recently noted that India had moved into modest current account surpluses in 2020 and 2021, but this may not last in view of rising import demand.

“Our experience has been that India can sustain a current account deficit of 2.5-3 per cent without getting into an external sector crisis. In fact, in a telling reminder of this fact, a record increase in gold imports took the current account deficit above this Plimsoll line to historically high levels during 2011-13. India faced the taper tantrum and was labelled as among the fragile five,” he had said in his keynote address in the conference on growth and development in the BRICS economies in November 2021.

Sunil Kumar Sinha, Principal Economist, India Ratings and Research, said the current account moving into a deficit should be seen as a process of normalisation of the economy.

“Current account deficit could widen further if commodity prices continue to remain high. So long as CAD remains in the range of 2.5 per cent to 3 per cent in the Indian context, it is not a cause of worry as this level of CAD can be managed without adversely impacting the exchange rate. The good part is that even though the trade deficit has widened, remittances have remained stable and software exports earnings have been growing at a reasonable pace,” he said.

India’s current account balance recorded a deficit of $9.6 billion or 1.3 per cent of GDP in the second quarter of the fiscal as against a surplus of $6.6 billion or 0.9 per cent of GDP in the first quarter, according to RBI data.

This was mainly due to a widening of the trade deficit to $44.4 billion and an increase in the net outgo of investment income. Analysts expect that elevated commodity prices, higher inflation and continued domestic demand will further widen the current account deficit and the balance of payments surplus could moderate going forward.

Nomura expects CAD to widen to 3.4 per cent of GDP in the fourth quarter of the fiscal, and to 1.9 per cent of GDP in 2022-23, from 1.6 per cent in 2021-22.

Acuité Ratings has also revised its 2021-22 current account deficit forecast to $46 billion from $38 billion earlier, as against a surplus of $24 billion in 2020-21.

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