Current account deficit is lower but not yet in comfort zone

CAD for the Jun-19 quarter came in at $14.32 billion, marginally lower in absolute terms than $15.8 billion announced in the Jun-18 quarter.

Oct 03, 2019 09:10 IST India Infoline News Service

On September 30, the RBI announced the current account deficit numbers for the quarter ended June 2019. Here are some of the key highlights of the current account deficit data (which is announced by the RBI each quarter). 
  • Current account deficit (CAD) for the Jun-19 quarter came in at $14.32 billion, marginally lower in absolute terms than $15.8 billion announced in the Jun-18 quarter.
  • CAD is always better viewed as a percentage of GDP and to that extent the CAD for the Jun-19 quarter came in at 2% of GDP compared to 2.3% of GDP in the Jun-18 quarter. However, the CAD was much lower at 0.7% of GDP in the Mar-19 quarter.
  • CAD is an expanded version of the trade deficit and also encompasses trade in services, foreign incomes, foreign transactions, remittances etc. The reduction in the CAD on a YOY basis was largely driven by improvement in services income.
How was the CAD figure arrived at?
To be able to interpret the CAD in the proper perspective, it is essential to break it up into components to see how the number is arrived at. Find the table which captures the break-up of the current account deficit for the Jun-19 and Jun-18 comparable quarters.
Details Jun-19 quarter Details Jun-18 quarter
Merchandise Trade Deficit (export – Import) ($46.21) billion Merchandise Trade Deficit (export – Import) ($45.75) billion
Services Trade surplus $20.03 billion Services Trade surplus $18.68 billion
Combined trade deficit ($26.18) billion Combined trade deficit ($27.07) billion
Add: primary deficit (investment income) ($6.12) billion Add: primary deficit (investment income) ($5.76) billion
Add: secondary income from transfers and remittances $17.98 billion Add: secondary income from transfers and remittances $17.05 billion
Current Account Deficit (CAD) ($14.32) billion Current Account Deficit (CAD) ($15.78) billion
 
The above table captures how the current account deficit was arrived at by the RBI for the Jun-19 quarter and the Jun-18 quarter. Three things logically follow from the above table. Firstly, despite a higher merchandise trade deficit in Jun-19 quarter, the bigger services surplus has more than compensated for that. This was largely driven by a pick-up in IT and other allied services in the current year.
 
Secondly, the next level of flows from remittances and NRI transfers were sharply higher in the Jun-19 quarter, which more than compensated for the higher investment payouts this quarter. To encapsulate the shift in the quarterly CAD on a YOY basis, the fall in CAD in the Jun-19 quarter can be largely attributed to better services exports and larger remittances from Indian nationals living abroad.
 
Key takeaways from the CAD figure
Current account deficit is never a comfortable situation to have because it basically implies that the country is borrowing for its breakfast. Check the comparison of current account deficit across countries (we have taken 5 biggest surpluses and 5 biggest deficits).

Data Source: IMF
 
With India and the UK at almost the same level of GDP, UK’s current account deficit is a lot more uncomfortable as compared to India. For a $25 trillion economy like the US, the CAD is approximately at the same share of GDP as India. Here is why 2% CAD a matter of concern for India.
  1. Unlike fiscal deficit which can be interpreted as pump priming, there is no component of pump priming in current account deficit. That is why India may have to be a little more careful. The CAD at 50% of fiscal deficit is normally considered worrisome for current markets. India has already crossed that mark.
  2. India’s problem of current account deficit is a lot stickier due to its overdependence on imported crude oil. Since India depends on imported crude for nearly 85% of its oil requirement, the CAD is overly dependent on the cycle of oil prices. For example, a rise of $10 in the crude price per barrel results in a 30 bps widening of the current account deficit. That is why CAD is highly sensitive to oil price movements.
The normal tendency is to justify higher CAD in India through the case studies of the US and UK. But such comparisons can be odious. The US has the exorbitant privilege of dollar being the hardest of currencies and that gives the US a distinct advantage. Similarly, the UK situation could change sharply once it gets out of BREXIT. The immediate challenge for the RBI and the Ministry of Commerce is to keep the CAD under 1% of GDP. That would surely require a good deal of support from oil prices.

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