Mumbai: India’s high current account deficit, which is being financed by volatile portfolio investments, is a concern, the annual economic survey said.
The deficit rose to 3.7% of gross domestic product (GDP) for the first half of the year ending 31 March, as a strong economic recovery led to higher import growth, the report prepared by advisers to finance minister Pranab Mukherjee said.
“Apart from the level of trade deficit, which is high, the vulnerability of the economy arises from the fact that the funding is coming from sources that are unstable,” said D.K. Joshi, chief economist at Crisil Ltd.
The current account deficit is likely to be over 3% of GDP for the entire 2010-11 fiscal year, economists said. The last time India had a current-account deficit of over 3% was during the crisis of 1991, when the government was close to defaulting on its external debt.
Although exports have been growing at a faster pace than imports in recent months on the back of a pickup in global recovery, the rising prices of commodities, especially crude oil, are likely to swell India’s import bill in the coming months. India imports almost 75% of the oil it uses.
The survey said lingering uncertainty on the state of public finances in developed markets has pushed investors to commodities.
“The surge in prices of commodities such as oil and food grains, however, is straining the balance of payments of emerging economies,” the survey said.
Oil price futures are trading at $111 (Rs 5,039.4) per barrel, and a wider basket of commodity futures, indicated by the Thompson Reuters/Jeffries CRB Index, is hovering around its 29-month high.
The Reserve Bank of India, in its last review of monetary policy on 25 January, had echoed similar concerns and estimated India’s current account deficit to close at 3.5% at the end of this fiscal.
A sharp increase in global commodity prices, particularly oil, could have an adverse impact on the country’s trade balance going forward, the central bank had said.
The key reason for the widening deficit was slackening non-merchandise trade, primarily due to a decline in investment income and private transfer receipts, and increase in services payments to foreigners, the survey said.
“The net invisibles surplus was $39 billion during the first half of fiscal 2011 and 8% lower than the year-ago period,” it said.
On the positive side, the survey pointed to a rise in India’s foreign exchange reserves, its growing share in world exports to 1.4%, and diversification in trading partners. Foreign exchange reserves stood at $297.3 billion, the fourth largest reserves in the world. While much of this was due to short-term flows, export growth could be a longer-term trend.
“The buoyancy in exports has been a positive feature and can cushion some of the pressures on the current account owing to rising oil prices,” said Jay Shankar, economist at Religare Capital Markets Ltd.
The United Arab Emirates has displaced the US as India’s top export destination in the first half of the current fiscal. Rising trade with Asia has been a key feature in the past decade. Asian nations account for a majority of India’s external trade, the survey said.
This trend could well continue as the industrial recovery has been much faster in Asia than in any other part of the world.
“Output in the (Asian) region is now 28% above pre-Lehman peak while elsewhere it is still 7% lower,” said a 25 February report by Richard Jerram of Macquire Group Ltd. The surge in global trade was led by Asia in the December quarter, the report said.
Bloomberg contributed to the story.