Economists expect CAD to be between 4.25-4.55% of GDP in FY14

Believe FM's projection of 3.7% of GDP too optimistic

India’s trade deficit has remained stable at $12.3 billion in July and is only marginally higher than the $12.2 billion seen in June. Undoubtedly, it’s is good news that trade deficit in July has come off from the elevated levels of $20 billion seen in October and November of 2013 to $12 billion, but India’s current account deficit is expected to be between 4.25 to 4.5% of GDP.

Mole Hau of BNP Paribas believes that even as deregulated fuel prices and recent restrictions to curb gold imports will help ease the current account deficit from a record high, but, at an expected 4.25% of GDP in FY14, it will remain unsustainably large. The INR will continue to remain under pressure until structural imbalances are addressed.

However, what is encouraging is that for the first time in four months, exports have risen by 11.6% on a year-on-year basis. The feeble recovery in the developed markets is visible in India’s exports too. After consistently falling for a large part of FY13, exports are showing an uptick.

Surath Sengupta, Head – Global Trade & Receivables Finance, HSBC India, believes that the trade data is encouraging in the short term with m-o-m increase in exports and reduction in imports. "This has been achieved primarily on account of slow-down in the import of gold and silver. On the export side, these are early signs of recovery in global demand. "

While the recovery in exports is encouraging, the recovery needs to be seen in the context of rising imports on a year-on-year basis. Thanks to interventions by the RBI, gold and silver imports have declined to $2.9 billion in July and oil imports have declined by 8% due to the slowdown.

Tirthankar Patnaik, economist at Religare Capital Markets, expects the monthly trade deficit figures to remain in the $12-14 billion range for the rest of the fiscal, led by lower imports due to weak domestic demand and a gradual pick-up in exports, thanks to a falling INR. Additional import curbs on non-essential items would further narrow the trade deficit. However, the Religare too maintains its estimate on CAD at 4.5% of GDP.

The issue is not merely of taming the trade deficit but funding the current account deficit.

Nomura’s Sonal Varma says that while the government’s estimate of a smaller current account deficit is in line with our view, the real issue is financing the deficit.

“Weak domestic growth prospects suggest that portfolio equity inflows and overseas borrowings will be much lower this year. Hence, we expect net capital inflows to slow, which will make financing the current account deficit difficult. Hence, we expect balance of payment pressures to continue,” she explains.