Narrowing current account deficit no cause for elation
The reduction in the current account deficit is not due to an increase in exports but a sharp drop in imports
Many analysts were hoping that India would achieve a current account surplus for the quarter ended June, the country’s first in 9 years. While the surplus did not materialize, the country’s current account deficit narrowed to a negligible 0.1% of gross domestic product (GDP).
This hurrah on the deficit should bring much happiness (since just three years ago it was an unprecedented 4.1% of GDP, labelling us part of the Fragile Five), but it would be myopic to rejoice.
Merchandise imports declined 11.5%, while exports fell by 2.1%. Simply put, Indian companies are unable to increase revenue through selling wares in overseas markets and, therefore, they are more unwilling to import raw material.
The fact is that the reduction in the current account deficit is not due to an increase in exports but a sharp drop in imports, and for a supply constrained economy like India, this reflects weak investment demand conditions.
There are several other indicators from the country’s balance of payments data that show a bleak picture. Another worrying sign is the decline in FDI (foreign direct investment) flows into the country. FDI inflow was $4 billion for the quarter ended June, a sharp drop from $10 billion a year before.
Clearly, the government’s push through its initiatives like Make in India and changes in policy to make it easier to do business in the country don’t seem to have caught the fancy of foreign investors yet.
It does not end here.
India’s strongest source of dollar inflows—remittances— is showing signs of weakening. Flows from personal transfers, money that Indians abroad remit back home, dropped to $13.8 billion in the quarter ended June from $15.7 billion a year ago. This is the lowest remittance inflow into the country in five years. Within this, remittances by workers continued to remain low too. Given that a bulk of remittances to India comes from Middle Eastern economies that thrive on oil exports, the crash in global crude oil prices has bitten the country through the remittances channel.