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The government estimates the Current Account Deficit (CAD) to be 2.5 per cent of GDP in the current fiscal.
The government forecast comes at a time when the rupee lost over 13 per cent since the beginning of 2018, of which 7 per cent was during June-September (till date). At the same time, there has been a spike in the prices of Indian crude oil basket and prices of petroleum products globally. This coupled with a weak rupee widened the deficit.
“We will have to live with a deficit (CAD) of 2.5 per cent,” a senior Finance Ministry official said while expressing optimism that the situation will stabilise soon.
CAD implies shrinking value of a country’s net foreign assets, which means less earnings and more payments in foreign currency. It is expressed as a percentage of GDP. It is not entirely in the hands of the government or monetary authority and depends upon the geo-political situation and the price of crude oil.
The deficit was 1.9 per cent in 2017-18 and 0.6 per cent in 2016-17. The Reserve Bank of India, on September 7, released data showing the deficit declined marginally to 2.4 per cent in the April-June quarter against 2.5 per cent in the year-ago period. However, in value terms, the deficit was higher at $15.8 billion during the quarter ($15 billion) mainly due to a higher trade deficit.
The official expressed optimism that widening of the deficit will not have much impact on India’s external situation as the foreign exchange reserve is still high. As on August, the forex reserve was at $400.1 billion. However, it may be noted that the reserve had to forego over $24 billion since March 31 due to intervention in the market to give support to the rupee and also due to heavy outflow of foreign portfolio investment (FPI) from the stock market.
International rating agency Moody’s, in its report, said the current account deficit will widen, but will not jeopardise India's strengthened external position. Higher oil prices will also contribute to a wider current account deficit. However, the current account gap will remain significantly narrower than five years ago. Moreover, economy-wide external debt is limited and the country's foreign exchange reserve buffers are ample.
On how the deficit will be financed, a research report by SBI said it is expected to be majorly financed by non-debt creating (Foreign Direct Investment and Foreign Portfolio Investment) capital inflows, which is around 44 per cent of the total capital flows. However, debt creating inflows, which increased in the last fiscal year, are expected to remain on the higher side this year as well. This will imply pressure on the rupee in case there is a sudden reversal of capital flows.
“The financial account surplus is expected to come around $59 billion, lower than the previous fiscal ($91.4 billion) due to foreign portfolio outflows which amounted to $9.3 billion till June. Portfolio outflows have happened this year since the US economy and dollar started strengthening. This is expected to turn India’s overall Balance of Payment into deficit mode after 6 years, thereby implying depletion of $16 billion (0.6 per cent of GDP) in forex reserves in the current fiscal,” the report, authored by Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, said.
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