V. Ramakrishnan/ PTI
Mumbai: India’s current account deficit nearly doubled in value in the last fiscal year, as high global oil prices widened the trade gap, and analysts expected further deterioration with no let-up in sight from rising crude prices.
The federal fiscal deficit for the first two months of the current fiscal year also widened. Economists said it could outstrip the budget estimate due to oil subsidies, a farm loan waiver and an expected salary hike for government workers.
“Oil prices hold the key to the level of India’s fiscal and current account deficits this year,” said Sonal Varma, an economist at Lehman Brothers.
“With rising oil prices, we expect the current account and the fiscal deficit to worsen in FY09
Oil touched a new record above $143 a barrel on 30 June. India imports about 70% of its oil and crude is its largest import. Retail fuel prices are state-controlled and the government has issued special bonds to state-run oil companies to partially compensate them for selling fuel at below-market rates.
The widening current account deficit has put the rupee under pressure in recent weeks, along with the higher oil import bill and investment outflows from the weakening stock market.
The rupee has fallen 8.4% so far this year against the dollar and hit a one-month low on 30 June of 43.1150 per dollar.
Invisibles v/s trade
The current account shortfall for the financial year which ended in March widened to $17.4 billion, or 1.5% of gross domestic product, from $9.8 billion, or 1.1% of GDP, in FY07 the central bank said.
The deficit was $1.04 billion in the January-March quarter, compared with a surplus in the year ago period. The December quarter gap was a revised $5.12 billion.
Net invisible receipts, which include software service exports and money sent by overseas Indians, were $22.8 billion in the March quarter from $20 billion in the previous quarter.
“The current account deficit for January-March quarter suggests that the usual seasonal increase in invisibles has not kept pace with the rise in trade deficit this year, largely due to rising oil import bill,” Varma said.
She expected the FY09 deficit to reach 3% of GDP.
Arvind Virmani, finance ministry chief economic adviser, said this month there was a very low probability the current account deficit would exceed 2.5% of GDP over the next four years.
For FY08 , private transfers to India totalled $42.6 billion, compared with $29 billion in FY07.
The Reserve Bank of India said the balance of payments surplus in the March quarter fell to $24.99 billion from a surplus of $26.74 billion in the December quarter.
“India should still get sufficient capital inflows to cover the current account deficit, but the overall balance of payments surplus is likely to moderate to $18 billion in 2008/09 from $92.2 billion,” Varma said.
The quarterly trade deficit, on a balance of payments basis, narrowed to $23.8 billion from $25.1 billion in October-December.
The government aims to keep the federal fiscal deficit at Rs1.33 trillion rupees ($31 billion), or 2.5% of GDP, for FY09 down from 2.8% in the previous year.
The federal fiscal deficit widened to Rs732.01 billion in April-May, the first two months of the fiscal year, from Rs621.35 billion in the same period a year ago.
The April-May deficit was 55% of the annual target, as the government stepped up spending. Sometimes the government frontloads annual expenditure but there is no set pattern.
Economists said a major portion of subsidy expenditure was not reflected in the official data.
“The quantum of the off-budget items are going to be higher than fiscal deficit itself,” said Dharmakirti Joshi at CRISIL.
Joshi expected the actual FY09 fiscal deficit to widen to 6.2% of GDP, once off-budget items were included.