• Thursday, 24 January 2019

High oil prices, trade deficit widen India's current account deficit

Mumbai, June 13 : A rise in trade deficit due to higher crude oil prices widened India's current account deficit (CAD) for 2017-18, Reserve Bank of India's (RBI) data showed on Wednesday.

According to the RBI data, the CAD for last fiscal widened to 1.9 per cent of the GDP (Gross Domestic Product) from 0.6 per cent in 2016-17.

The current account is the net difference between inflows and outflows of foreign currencies.

Accordingly, the country's trade deficit increased to USD160 billion in 2017-18 from USD112.4 billion in 2016-17.

"Net invisible receipts were higher in 2017-18 mainly due to increase in net services earnings and private transfer receipts," the RBI said in a statement on "Developments in India's Balance of Payments".

In terms of inflows, gross FDI (Foreign Direct Investment) into India increased to USD61 billion in 2017-18 from USD60.2 billion in 2016-17.

However, net FDI inflows in 2017-18 fell to USD30.3 billion from USD35.6 billion in 2016-17.

As per the RBI data, portfolio investment recorded a net inflow of USD22.1 billion in 2017-18 as compared with USD7.6 billion a year ago.

"In 2017-18, there was an accretion of USUSD 43.6 billion to the foreign exchange reserves (on a BoP basis)," RBI said.

On the quarterly basis, the data showed that the country's CAD rose to USD13 billion during the fourth quarter (January-March) of 2017-18 from USD2.6 billion in the like quarter of 2016-17.

"The widening of the CAD on a year-on-year (y-o-y) basis was primarily on account of a higher trade deficit (USD41.6 billion) brought about by a larger increase in merchandise imports relative to exports," the statement said.

The Q4 CAD accounted for 1.9 per cent of the GDP as against 0.4 per cent of the GDP in the like quarter of 2016-17.

"Net services receipts increased by 8.8 per cent on a y-o-y basis mainly on the back of a rise in net earnings from software services and other business services," the statement said.

"Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to USD18.1 billion, increasing by 15.1 per cent from their level a year ago."

In the financial account, net FDI stood at USD6.4 billion in Q4 of 2017-18 higher than USD5 billion in Q4 of 2016-17.

The data disclosed that net inflow of portfolio investment was just USD2.3 billion as against net inflow of USD10.8 billion during Q4 2016-17; on account of moderation in net purchases in both the debt and equity markets.

"Net receipts on account of non-resident deposits amounted to USUSD 4.6 billion in Q4 of 2017-18 as compared with USUSD 2.7 billion a year ago," the statement said.

In Q4 of 2016-17, foreign exchange reserves (on BoP basis) increased by USD13.2 billion as against an accretion of USD7.3 billion during the like period of 2016-17.

ICRA's Principal Economist Aditi Nayar said: "The deterioration in India's current account deficit to USD13.0 billion in Q4 FY2018, is in line with our forecast of around USD12-14 billion."

"The size of the current account deficit in Q4 FY2018 nearly rivalled the full year deficit recorded in FY2017, underscoring the impact that rising commodity prices have on the external balances of net importers such as India."

Nayar pointed out that despite the contraction in gold imports, the merchandise trade deficit worsened in Q4 FY2018.

"Around half of the magnitude of this deterioration is attributable to the larger oil import bill, following the rise in crude oil prices," Nayar said.

India Ratings Chief Economist Devendra Kumar Pant said: "Nearly 46 per cent deterioration in trade deficit in FY18 was due to oil. However, higher services exports and remittances in FY18 reduced ballooning of CAD. Despite widening of CAD, strong capital and financial account flows resulted in USUSD43.6 billion increase in foreign exchange reserves, which provided strength to currency."

"Going forward current account situation in FY19 is likely to worsen and this coupled with weak capital flows will exert pressure on currency. Deteriorating current account and fiscal slippage does not augur well for macro fundamentals."