Soaring Current Account Deficit of India

According to the data issued by the Reserve Bank of India, the current account deficit (CAD) of the country narrowed to 0.7 per cent of GDP for the financial year 2016-17 from 1.1 per cent in 2015-16 mainly due to contraction in the trade deficit. India’s external sector balance sheet remained lower than 2 per cent of GDP during the quarter end in March of 2017, despite an increase in the merchandise import bill and almost static growth in the services income as both software services income as well as remittances by the overseas Indians were at the same level as that of the previous year. Strong FDI as well as portfolio flows resulted in a sharp rise in capital account flows, putting the overall balance of payment on a higher surplus.

Trade deficit widened to USD 29.7 billion from USD 24.8 billion because of higher imports in the first three months of 2017. India reached a CAD of USD 3.43 billion or 0.6 per cent of GDP in the last quarter of FY 2016-17, higher than USD 0.3 billion gap a year earlier but lower than USD 8.0 billion in the preceding quarter. Secondary income surplus declined to USD 24.8 billion because of higher imports. Services surplus widened to USD 17.6 billion from USD 16.1 billion due to higher earnings from travel, transport, construction and other business services. Primary income deficit fell to USD 5.6 billion from USD 6.6 billion, while private transfer receipts, mainly representing remittances by Indians employed overseas were at USD 15.7 billion, barely unchanged from the preceding quarter.

Looking at the recent data, export growth moderated sharply to 4.4 per cent in June from 8.3 per cent in May; while imports growth eased to 19 per cent in June from 33.1 per cent in May, the smallest gain since January. Some moderation on imports was expected given the slowdown in production ahead of the GST. Purchases have increased for electronic goods (24.22%); pearls, precious & semi-precious stones (86.31%); machinery electrical & non-electrical (7.02%) and gold (102.99%).
Going forward, merchandise exports are expected to rise by 5-7 per cent to USD 295-300 billion and merchandise imports to expand by 6-8 per cent to USD 418-423 billion in FY 2018. Volatility in commodity prices could significantly influence the pace of growth of import and export values. With this respect, India’s current account deficit could widen to 1.3 per cent of GDP in 2017-18, from 0.7 per cent in 2016-17 mainly due to stronger domestic growth in second half of the year. Import demand is expected to resume once disruptions due to the implementation of the GST settles down after July.

India needs to implement more policies in order to improve manufacturing sector and production to increase its export of goods and services to a greater extent. The country needs to focus on decreasing the imports of the major contributors, especially gold. Despite many steps taken to reduce it in recent years, there has been significant jump in gold demand. Savings being wasted on a dormant metal instead of being invested in productive business activities is a major concern. Any significant strides on this front would require structural reforms of the financial sector that encourages more competition to spur financial innovation and access.