Editorial

The Covid crisis may lead to a CAD surplus this year

| Updated on May 21, 2020 Published on May 21, 2020

But that’s no cause for complacency as it is likely to be caused more by India’s imports collapsing than rising exports

In the past, global economic crises have always triggered a deteriorating balance of payments situation for India — with a widening Current Account Deficit (CAD) and a depreciating currency. But the Covid outbreak seems to be leading to a diametrically opposite situation — a current account surplus caused more by India’s imports collapsing more than rising exports. Barclays recently forecast that India would report a current account surplus of $19.6 billion or 0.7 per cent of GDP in FY21 while characterising this as an ‘unwelcome surplus’ because it is triggered mainly by the demand shock caused by the pandemic. SBI’s estimate earlier this month also made a similar forecast. Both institutions also expect India to report a Balance of Payments surplus this fiscal. Should these forecasts come good, they would offer a breather to domestic policymakers from having to find forex flows to finance the trade gap this fiscal. The rupee too, backed by the RBI’s forex war-chest may hold up. But given the highly fluid situation on global trade and the fact that India’s positive trade balance may be short-lived, policymakers will need to use this window wisely instead of getting complacent.

While India’s import bill is quite likely to bounce back once the Covid impact subsides, the pandemic appears to be permanently re-ordering India’s BOP dynamics in three ways. One, India’s merchandise exports have always been hyper-sensitive to demand and growth in destination markets. Here, the WTO’s forecast that global trade could shrink by a third in 2020, as well as rising protectionist tendencies in key markets like the US, could pose challenges to a quick revival in merchandise exports, particularly for discretionary items like jewellery and apparel. Apart from getting battered MSMEs — critical cogs in the export supply chain — back on their feet in short order, diversifying India’s export basket may now be essential for export revival. Two, India’s services exports driven by IT and IT-enabled services have traditionally weathered crises by leveraging their labour cost advantage, to grab a bigger share of the global offshoring pie. But this time around, curbs on global travel and rising barriers of protectionism threaten the offshoring model itself. Three, inward remittances from NRIs particularly in West Asia have been a key safety net on India’s BOP position during past crises. But with West Asian economies laid low by the oil rout, this time around India may have to brace for not just a sharp fall in remittances, but also a reverse migration of its diaspora.

India may need to focus on ensuring that foreign direct and portfolio investors continue to find it an attractive destination once the dust settles on Covid. This would call for expedient demand-side measures to lift the GDP from this slump and honest efforts to reduce the policy flip-flops and sectoral interventions that make India such a difficult place to do business in. The stimulus so far has been of limited help on these fronts.

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Published on May 21, 2020
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