Rising Current Account Deficit

What is the issue?

An independent research has shown that current account deficit (CAD) is expected to increase significantly in 2017-18.

What are the highlights?

• India’s CAD in the current fiscal year is forecast to be the highest in 6 years.
• It may go up to between 1.6% and 1.8% of GDP.
• Another prediction projects CAD to be likely at 2.4% of GDP, higher than in 2013-14.
• This is even after taking Brent crude prices at an average of $65 per barrel (minimum possible).
• Moreover, the overall balance of payments is also projected to slip into a deficit this fiscal.
• As, capital inflows may be insufficient to cover the current account deficit.
• The rupee is therefore expected to weaken.

What are the possible reasons?

• Crude oil price could be the major reason for a problematic CAD.
• This is something which is beyond the government’s control.
• But besides this, within the country, there is a significant increase in imports over the past year.  
• And notably not all of it is oil-related.
• Gems and jewellery imports have also increased.
• Overall, the increase in imports was nearly twice as high as that in exports over the past financial year.
• Increasing imports naturally lead to outflow of capital by way of payments.

What are the policy shortfalls?

• Government has imposed consumption constraints similar to the limits on gold imports.
• Apart from this, the government does not have too many options to decrease imports.
• But this is not the case with exports.
• The deficit could have been balanced by encouraging the exports.
• However, the government has failed to boost export growth.
• Past few years had been years of stable macroeconomic indicators with a gift of cheap oil.
• But these have not been adequately exploited to improve export growth for the country's benefit.
• Exports have remained around or below the $300-billion mark since 2011.
• Rival exporting countries like Bangladesh and Vietnam have vastly increased their export revenues.
• Export growth remained in single digits even in 2017-18, the strongest year for world trade growth since 2011-12.
• Evidently, growing trade deficit is more a consequence of failing on exports rather than increasing imports.

What is the way forward?

• The only sustainable path to stability on the external account is through a vibrant and globally integrated exports sector.
• Some sector-specific “packages”, beyond just tax incentives, are essential for export growth.
• Besides, the overall tax situation has to be improved.
• The limitations and the resultant crunch in exporters’ working capital with GST implementation has to be sorted out.
• If indeed the balance of payments turns adverse, then at least the rupee might fall from its current over-valued levels.
• This could render exports cheaper.
• So, the government must work to render other aspects of the exports supply chain competitive.

Source: Business Standard