Current account deficit may fall this year
Services exports, remittances could help narrow it in 2012-13
The country’s current account deficit (CAD) is likely to remain under pressure this financial year, too, as merchandise exports are not expected to match the 21 per cent growth seen in 2011-12.
Even so, the deficit may come down a bit as a percentage of gross domestic product (GDP) this financial year compared to the last one. Imports, too, may not witness the 32.15 per cent growth registered in 2011-12 and improvement in the conditions in the United States might lead to services exports doing better, according to analysts. Besides, strong Gulf economies may continue to result in robust remittances from overseas Indians, they add.
The CAD may fall anywhere between three and 3.6 per cent of the GDP in 2012-13, against 3.5-4 per cent expected for the last financial year, say economists.
To finance such a high CAD for another year, capital inflows have to be very high, they say, adding government needs to clear the air on the General Anti-Avoidance Agreement Rule (GAAR) to attract investments from foreign institutional investors.
“It is likely to remain in the range of 3.5-4 per cent of GDP for the whole of last fiscal,” according to Crisil chief economist D K Joshi.
On the other hand, CARE Ratings chief economist Madan Sabnavis pegs CAD at 3.7-3.9 per cent of GDP for 2011-12.
While Joshi says CAD this financial year is likely to be 3.6 per cent of GDP, Sabnavis pegs it at 3-3.5 per cent. “CAD will continue to be under pressure this financial year, though it might improve a bit from 3.7-3.9 per cent expected for FY12,” Sabnavis said.
The first nine months of 2011-12 saw a rise in the trade deficit to $132.3 billion—that means just over $43 billion in every quarter on an average. But, trade deficit for the full year rose to $184.92 billion, which means over $48 billion in every three months on an average. It means trade deficit rose in the last three months, and if economists are expecting lower CAD for the whole 2011-12 year than for the first nine months, then services exports should neutralise this higher trade deficit.
The surplus in services trade stood at $34.1 billion in the first nine months of FY12.
But, more than CAD, it is trade deficit that is worrying Joshi as it stands at 10 per cent of GDP in the last financial year against around three per cent even in the balance of payments crisis period of 1991-92.
Joshi expects CAD to be at 3.6 per cent of GDP this financial year. The merchandise exports, he says, will register “just single to low double-digit growth” in the ongoing financial year. Sabnavis, however, expects merchandise exports to grow by 10-15 per cent this financial year, as the US is showing signs of revival even as Europe is not recovering.
He expects the growth in trade deficit to be not as high as in the last financial year, as gold imports might come down, though there is no certainty over oil imports despite international prices not showing a spurt this fiscal so far.
In 2011-12, India’s trade deficit grew to $184.9 billion from $118 billion in 2010-11. Commerce Secretary Rahul Khullar had listed petroleum and gold as the main catalysts behind this. “In these, imports were higher by about $69 billion compared to 2010-11 and that almost entirely accounts for the rise in the trade deficit in 2011-12,” he added.
Sabnavis also expected services growth to do better since the US is recovering. However, Infosys co-chairman S Gopalakrishnan had earlier said that services exports growth would remain muted in the next three-five years because of a slow recovery in the US and problems in the Euro zone.
Besides, remittances will continue to be strong this financial year as well. That will not allow CAD to deteriorate further, Sabnavis says, pointing to a strong recovery in the Gulf region and in the US.
According to a World Bank report, weak rupee and robust economic activities in the Gulf region resulted in India receiving the highest amount of remittances among developing countries at $63.7 billion from nationals working overseas in 2011.
In fact, India got marginally more remittances than China, which received $62.5 billion. Though the prudential level of CAD is below three per cent for developing countries like India, a more important question is whether there are sufficient capital inflows to finance CAD.
Sabnavis says that while FDI flows will remain strong this fiscal as well, investments by FIIs need to be wooed by addressing their fears on GAAR. External commercial borrowings would also remain robust this fiscal, but they also raise the debt level, he adds.
During the first three quarters of 2011-12, there was a net drawdown of reserves (on a BoP basis) to the extent of $ 7.1 billion mainly due to a widening of the current account deficit compared to a net accretion of $11 billion recorded in the corresponding period of the previous year.