Current account imbalance hits India harder than EM peers, shows data

India's current account deficit is projected at 3.5 per cent for 2022, says IMF World Economic Outlook report

India is doing worse than many emerging market (EM) peers amid the widening current account balances globally. The current account balance is a measure of the money flowing into the country through trade and other means versus similar outflows.

The International Monetary Fund (IMF) projects that India will have a current account deficit equal to 3.5 per cent of its gross domestic product (GDP) in 2022. This is among the highest that the country has seen.

Other EMs’ current account balance has not been as badly affected by the recent economic volatility, shows an analysis of data from the IMF’s World Economic Outlook released on Tuesday. 

India’s current account balance is worse than that of Brazil, China, Russia and emerging markets as well as developing market peers in Asia and Europe, besides Latin America and the Caribbean (chart 1).

India’s figure had touched around five per cent in 2012, ahead of the taper tantrum, according to additional data from the World Bank. Global current account balances increased during Covid-19. It has also risen because of the recent commodity price volatility.

“Whereas global trade growth is declining, global trade balances have widened. After shrinking during 2011–19, global current account balances — the sum of all economies’ current account surpluses and deficits in absolute terms — increased during Covid and are projected to rise further in 2022. It has in 2022, mirrored the increase in commodity prices associated with the war in Ukraine. This has raised balances for oil net exporters and reduced them for net importers,” said the IMF report.

Rising prices of crude oil affects India more than many countries. This is because it imports over 80 per cent of its crude oil requirements. This also has an impact on inflation. Consumer prices in India are expected to rise 6.9 per cent in 2022. However, inflation numbers are higher in other countries (chart 2).   

The IMF expects inflation to begin cooling in 2023. It added that this may be affected by any spike in energy or food prices.

“…the forces shaping the outlook point to faster disinflation in advanced economies than in emerging markets and developing economies,” it said.

Widening global current account balances need not necessarily be negative, according to the IMF report. It added, however, that excessive global imbalances often lead to trade tensions and protectionist policies. There is also the risk of volatile currency movements and capital flows.