Govt not to curb imports to rein in CAD

The government seems to be in no mood to curb imports, even though the fear of a higher current account deficit (CAD) looms large.

CAD implies shrinking value of a country’s net foreign assets, which means less earnings and more payments in foreign currency. According to the RBI, the CAD increased to 1.9 per cent ($48.7 billion) of GDP in 2017-18 from 0.6 per cent ($14.4 billion) in 2016-17 on the back of widening trade deficit.

An SBI report, released on Monday, said the deficit is expected to reach 2.8 per cent of GDP ($75 billion) during the current fiscal, with merchandise trade imbalance likely to increase to $188 billion as against $160 billion in 2017-18.

Though the rupee has again moved up above 70 against the dollar, a senior Finance Ministry official said, there was “no need to react in panic.” The rupee closed at 70.16 a dollar on Monday.

Factors affecting the rupee

The official said three factors — trade wars, dollar strengthening against other currencies and crude oil prices — are affecting the rupee. Since these are external factors, the government has no control over them, he said. “In terms of crude price, the government can take a hit up to $70,” he said.

The price at which the Indian refiners buy their crude oil crossed $75 a barrel in May, but now it has come down to around $71-72 a barrel. The government expects the price to fall in the coming days and settle at around $67-$68 a barrel, which is why it is not pushing for any emergency measure now, the official said. Meanwhile, a report by the Economic Research Department of the SBI, quoting data from the Petroleum Planning and Analysis Cell of the Ministry for Petroleum and Natural Gas, said while the volume of oil imports by India increased by 5.6 per cent in the first three months (April-June) of the current fiscal, oil price (Indian basket) has increased 46 per cent during the same period.

“Had the oil price remained the same as in 2017, our crude oil import bill would have been 31.7 per cent lower in the first quarter of FY19. Whereas if the volume of crude oil import had remained the same as in the previous year, our crude import bill would have been 5.5 per cent lower, thereby showing that price effect reigns supreme,” the report said.

If higher oil prices pumped up the import bill, lukewarm export performance took the trade deficit to $18 billion in July.

Non-oil imports witnessed higher growth of $31.4 billion in July (average growth of 30.8 per cent since November 2017) on account of higher imports of engineering goods, electronics, metals and machinery.

Chinese currency

There is one fear for the government and that is the possible devaluation of the Chinese currency Yuan or Renimbi. There are reports that China may devalue its currency to curb the impact of US hiking duties on Chinese goods.

Experts believe that if that happens, then Chinese goods will have more competitive advantage in the international market and that is bad news for India’s surging trade deficit.

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