Current account deficit to be at US$16-17bn in Q1FY20: ICRA

ICRA forecasts India’s CAD to widen to US$63-68bn in FY20, from US$57.2bn in FY19, while remaining would be steady at around 2.1% of GDP.

Jul 18, 2019 10:07 IST India Infoline News Service

Indian Currency
ICRA expects the current account deficit (CAD) to remain largely steady at US$16-17bn or 2.3% of GDP in Q1 FY20, despite the recent contraction in merchandise exports and imports.

This de-growth is, however, likely to persist in the immediate term, given the year-on-year (yoy) decline in crude oil prices, and the impact of the recent customs duty hike on gold and precious metals. Such factors, in addition to the threat imposed by global trade wars, as well as sluggish domestic demand, are likely to restrict the overall growth of both merchandise exports and imports to low single digits in FY20.

ICRA forecasts India’s CAD to widen to US$63-68 bn in FY20, from $57.2 bn in FY19, while remaining steady at around 2.1% of GDP.

Aditi Nayar, Principal Economist, ICRA Ltd, said: “The widening in the merchandise trade deficit is likely to be absorbed by a mildly higher services trade surplus and remittance flows in Q1 FY2020. As a result, the CAD is expected to remain largely steady at US$16-17billion or 2.3% of GDP in the just-concluded quarter, relative to US$15.8 billion in Q1 FY2019.”

Recently released data indicates that India’s merchandise exports and imports contracted by 1.7% and 0.3%, respectively, in Q1 FY2020. “The prevailing YoY decline in crude oil prices and a temporary dip in gold imports following the tax changes introduced in the Union Budget, may well result in a contraction in aggregate merchandise imports as well as exports in July 2019. However, both these factors would contribute to a sizeable reduction in the size of the trade deficit in July 2019 to approximately US$16.0-16.5 billion from the US$18.6 billion recorded in July 2018, which was the highest monthly print for FY2019,” Ms. Nayar added.

An anticipated decline in the average price of the Indian basket of crude oil to US$65/barrel in FY2020 from US$70/barrel in FY2019, the risk related to global trade wars, and signs of moderation in domestic consumption and industrial demand, would exert a drag on the headline pace of expansion of merchandise exports and imports in the ongoing year. Moreover, high gold prices may restrict growth in demand for imports of the precious metal. At present, ICRA anticipates that merchandise exports and imports would grow by a low 2-3% and 4-5%, respectively, in FY2020. Nevertheless, with the pace of growth of inbound shipments likely to exceed that of exports, ICRA expects the merchandise trade deficit to widen to ~US$193-198 billion in FY2020 from US$180 billion in FY2018.

A revival in gold imports, closer to the festive season, may push up the size of the CAD to US$28-30 billion in H2 FY2020, relative to the US$21.5 bn recorded in H2 FY2019. Overall, ICRA expects India’s CAD to widen at an absolute level for the third year in a row, to US$63-68 billion in FY2020, from US$57.2 billion in FY2019, while remaining steady at around 2.1% of the GDP.

A sustained pick-up in the price of crude oil, which appears to be an unlikely scenario at present, remains a risk to the size of the CAD. According to ICRA, every US$1/barrel increase in the average price of crude oil in FY2020, is likely to expand the CAD by around US$1.6 billion.

Related Story