Govt pegs FY19 current account deficit at 2% of GDP on slide in oil prices

With global crude oil prices slumping to below $50 a barrel just months after crossing $86, the Prime Minister Narendra Modi-led government is now confident that the current account deficit (CAD) for 2018-19 (FY19) can be contained at about 2 per cent of gross domestic product (GDP). Earlier, the government had estimated the CAD would be 2.8 per cent of GDP. Both of these are internal estimates.

“When the oil prices were at their peak, it appeared that the CAD for FY19 was heading for somewhere around 2.8 per cent of GDP. Now, since the decline, the current trajectory appears to be around 2-2.2 per cent of GDP. If the oil prices keep slipping, it could even be below 2 per cent,” a senior government official said.

“There was a time when oil prices had gone up sharply. There were also other headwinds, such as the pace at which the Fed (United States Federal Reserve) was tightening rates. We also had problems with our credit markets. The good news is that on all three fronts, the pressure has eased significantly,” the official added.

Rating agencies and research firms have so far said the FY19 CAD would be much higher than 2017-18, which was 1.9 per cent of GDP.

Moody’s had said in August that India’s CAD will widen to 2.5 per cent of GDP in the current fiscal year because of higher oil prices and depreciation of the rupee.

On Boxing Day, crude oil prices, especially Brent Crude, dipped below $50 a barrel for the first time since July 2017, before recovering, as the market turmoil and worries over US supply countered signs that the coalition of oil-producing countries may extend or deepen output cuts.

 

Oil has plunged more than 40 per cent from a four-year high in October on the prospect of a supply glut. For Brent, this was $86.29 a barrel on October 3.

“I think for the first half of the year, CAD would be averaging around 2.8 per cent. In the October-March period, with the fall in oil prices it should come down, so one can consider an average of 1.5 per cent for the second half of this fiscal. That will take you to an average of a little above 2 per cent for the full year. The government is realistic in its assessment,” said Dhananjay Sinha, head of research at Emkay Global Financial Services.

In an interview with Business Standard for the news service division of All India Radio on Tuesday, Finance Minister Arun Jaitley said the problem arising out of oil prices was behind us.

“Two months ago, I would have said the major problem is oil prices. That, at least transiently, seems to be behind us. And therefore, the effect it had of expanding our CAD has receded. We still have a CAD, but it may not be as significant as we thought it would be about two months ago,” Jaitley had said.

Optimistic outlook

• With fall in oil prices, govt cuts internal CAD estimates
• Sources say internal CAD estimates around 2-2.2% of GDP
• Earlier estimates were 2.8% of GDP
• Rating agencies have so far said CAD would be much higher than 2017-18, which was 1.9% 
• Oil prices tumble from $85 a barrel plus in Oct to below $50
• Analysts say government assessment realistic