What a widening CAD portends for the economy
Mint analyses the possible reasons and their impact behind India’s widening current account deficit (CAD)
India’s current account deficit (CAD) widened to a four-quarter high at 2.4% of gross domestic product (GDP) in the April-June period from 1.9% in the January-March quarter of 2017-18. Mint analyses the possible reasons and their impact.
Why is CAD rising?
Tensions in the Gulf region, US sanctions on Iran and the instability in key oil exporting nation Venezuela pushed global crude prices above the $75-a-barrel mark. Being a net importer of fuel, India’s trade deficit went up. Petroleum ministry data shows that while India’s oil imports rose 5.6% in Q1FY19, oil price in the Indian basket surged 46% in that time. A weakening rupee has made imports costlier. The China-US trade war may hamper export growth, while rising investment demand will lead to more imports. This may further widen CAD in FY19.
Is the rise in CAD worrying?
Amid rising global volatility, CAD financing is a worry. CAD will be financed through a mix of FDI, portfolio flows, foreign reserve management. While FDI flows rose in recent years, a strong dollar, tighter global financial conditions have put more pressure on portfolio investments. In Q1FY19, the net outflow of portfolio investments was $8.1 billion, against a $2.3 billion inflow in Q4FY18. IMF said that based on India’s historical cash flows, capital inflow curbs, global markets may not be able to finance a CAD above 3% of GDP.
How will a widening CAD impact the rupee?
Higher CAD will put the rupee under pressure and may raise the cost of overseas borrowing. Depleting forex reserves could raise CAD further.
Why does CAD matter?
Current account balance measures the external strength or weakness of an economy. It largely consists of the country’s trade balance in goods and services with the rest of the world, and private transfer receipts, primarily representing remittances in the case of India. A current account surplus implies the country is a net lender to the rest of the world, while a deficit indicates it is a net borrower.
Where will India’s CAD end up in FY19?
CAD forecast in FY19 ranges from 2.5% to 2.9%. IMF has projected India’s CAD to widen to 2.6% of GDP in 2018-19. India Ratings expects CAD to be at 2.6% of GDP in FY19, while Icra says it would widen to 2.8%. Kotak Securities said that assuming Brent crude prices at an average of $72.5 a barrel, CAD will rise to 2.9% of GDP. But at current levels, India’s CAD is much narrower than the near 5% of GDP during the taper tantrum in 2013.
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