Economy

‘Falling imports, moderate oil prices to help post 0.4% current account surplus for the first time since FY04’

PTI Mumbai | Updated on July 27, 2020 Published on July 27, 2020

For the first time since FY04, the economy is set to close the current fiscal with a current account surplus of 0.4 per cent of GDP, boosted by falling imports and crude prices and not driven by better exports, according to a report.

After many quarters, the economy logged in a marginal current account surplus in June quarter at 0.1 per cent or $600 million against a deficit of $4.6 billion or 0.7 per cent of GDP in FY19, according to the latest Reserve Bank data.

For fiscal 2020, CAD improved to 0.9 per cent of GDP from 2.1 per cent in FY19.

“For the first time since FY04, the economy is set to register a small current account surplus of 0.4 per cent of GDP in FY21, led by weak domestic demand and lower crude prices leading to a collapse in imports rather than strong export recovery,” Tanvee Gupta Jain, the house economist at UBS Securities India said in a note, without quantifying the surplus amount that year.

According to the RBI, in FY04, the country logged in current account surplus at $10.6 billion, which was 1.8 per cent of GDP of that year.

However, she added that the surplus trend will not be sustained for long as rising crude prices, gradual recovery in domestic demand and only a modest recovery in exports will reverse the trend.

“We estimate the current account to swing to a deficit of 0.3 per cent of GDP in FY22, which is still lower than sustainable range on below trend GDP growth,” she said.

The Reserve Bank of India said the current account surplus was primarily due to a lower trade deficit, which penciled in at $35 billion and a sharp rise in net invisible receipts of $35.6 billion.

Rise in net earnings

Net services receipts rose to $22 billion in the quarter due to a rise in net earnings from computer and travel services, the RBI had said, adding private transfers, mainly remittances, jumped 14.8 per cent to $20.6 billion.

Jain also warned of remittances – where India is the largest recipient at $76 billion or 2.7 per cent of GDP in FY20 – plunging by 25 per cent this year. “Going forward, the sharp fall in crude prices will affect the growth of Gulf Cooperation Council, which accounts for around 62 per cent of remittance inflows to the country.

“According to our analysis, every 10 per cent fall in crude prices reduces remittances by 7 per cent in the long-run. Similarly, weak US economic outlook would adversely affect employment/incomes of migrants and thus remittances.

“Based on this, we expect private transfers to slow to $55-60 billion FY21 down 25 per cent from FY20,” said Jain.

At over $518 billion, the reserves cover 86 per cent of external debt, up from 68 per cent in FY14, but below 138 per cent in FY08. Import cover for reserves is over 15 months, much better than the seven months in FY13 when the rupee was at its worst and for 14.4 months in FY08.

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Published on July 27, 2020
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