Current account deficit likely to touch 4.2% of GDP: Nomura

The current account deficit may touch 4.2 per cent of gross domestic product (GDP) in this fiscal as well, as upside risks to the external environment are rising for the economy, brokerage firm Nomura said on Wednesday.

The brokerage had earlier forecast a tempered 3.8 per cent current account deficit (CAD). In the past fiscal too CAD had hit a record of 4.2 per cent of GDP.

“With external situation remaining very worrying, we see more upside risks to our CAD projection of 3.8 per cent with the current trends suggesting that it could be as high as 4.2 per cent of GDP, which was recorded last fiscal,” Nomura India economists Sonal Varma and Aman Mohunta said in a note.

However, they blamed the latest spike in imports due to the import substitution, saying, “The phenomenon of rising imports and lower domestic output can be explained by increasing import substitution as a result of supply—side constraints and elevated inflation.”

The trade deficit widened to an all—time high of $21 billion in October from $18.1 billion in September due to weak exports, which declined for the sixth month in row to minus 1.6 per cent y—o—y in October and rising imports which rose 7.4 per cent in the month.

Explaining the rising upside risks to higher CAD, they said the problem is that the rise in non—oil imports is not consistent with a slowing economy, as the IIP data suggest.

Also, the higher trade deficit reflects weak exports, driven by a seasonal rise in gold demand and also a genuine improvement in imports due to import substitution.

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