Home / News / India /  Cheap oil, more exports may keep India’s CAD low

Why is current  account suddenly in a surplus?

India’s current account has historically been in deficit. Many factors are responsible for a current account surplus, including low oil prices, supply disruptions, and an increase in the value of our exports because of the massive fiscal response by some advanced countries. Even before the coronavirus outbreak, our current account deficit (CAD) had narrowed because of the low oil prices that came as a result of excess supply in the international market. The high value of oil imports makes our current account sensitive to changes in oil prices.

Does this mean weaker domestic demand?

For an economy such as India, a current account deficit could imply a weaker domestic demand as it signals less imports rather than greater exports. However, several other factors are at play. Lockdown restrictions could have resulted in adequate inventory piling up, leading to reduced imports. There could also be risk aversion on the part of businesses and consumers. Nevertheless, a current account deficit at this juncture does point at a weaker level of domestic demand which could be because of the heightened uncertainty and its consequent risk aversion.

Rising import bill
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Rising import bill

What keeps the current account in deficit?

A current account deficit means imports are more than exports. Key items in our imports include oil, gold, and electronic products. Therefore, a sharp increase in international oil prices impacts the value of our imports, thus increasing the current account deficit, while a sharp decrease has the exact opposite impact. This is also true for gold.

Why are oil prices low for so long?

Low oil prices have resulted in a lower level of CAD and even surplus at times over the last few years. The availability of US oil has resulted in surplus oil production, leading to low prices. The curbs across the world further reduced the demand for oil, resulting in a significant dip in international oil prices. The Opec has announced production cuts from time to time. However, non-Opec producers have emerged as significant players in the international market diminishing Opec’s ability to determine oil prices.

What other factors can affect CAD?

Low oil prices may become the norm and benefit India as the world curtails the use of fossil fuels. The UK has announced that it will ban the sale of petrol and diesel cars by 2030 while France plans to ban it by 2040. As India integrates with global value chains over the coming few quarters, we will see a significant improvement in our export performance. The substantial stimulus by other nations is positively influencing our exports and is likely to continue till such policies are reversed.

Karan Bhasin is a policy researcher

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