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Check Current Account Deficit (CAD) With Decisive Steps

 

JUNE 19, 2018

By TIOL Edit Team

INDIA's soaring current account deficit (CAD) is cause for deep concern. It has grown three times in 2017-18 due to growing trade deficit, hardening crude prices, decline in net foreign direct investment, etc.

The country's external vulnerability is currently elevated because of global trade tussles triggered by the United States. Respite from further rise in petroleum price is not on the horizon. This, in turn, is bound to lead to rise in prices of oil and gas-derived commodities especially fertilizers. This means imports would grow faster than in preceding couple of years, thereby giving a push to CAD.

Last month Goldman Sachs reportedly revised its projected rise in India's CAD for 2018-19 to 2.4% of gross domestic product (GDP) from earlier estimate of 2.1%keeping in mind anticipated further rise in crude prices.

Earlier this month, India Ratings and Research (Ind-Ra) also issued an alert on CAD. It believes a combination of elevated crude oil price and weak rupee, if sustained for more than a quarter, will have an adverse impact on India's current account position, inflation, monetary policy stance and fiscal balance.

Ind-Ra observed: "If crude basket averages USD68-72.86/bbl and rupee averages 66.6-67/USD for FY19, the current account deficit could widen USD22 billion-31 billion in FY19. Wholesale inflation could also increase 70-80bpfrom the agency's current forecast of 3.4% and retail inflation 30-35bp from its current forecast of 4.3%".

The US new corporate tax regime, designed to attract back American MNCs savings parked abroad, is likely to moderate FDI inflows to India. Add to this , impact of weakening rupee. The influence of political uncertainty in the last year of Modi Government on CAD is yet another factor to reckon with.

The acceleration in imports & deceleration in FDI inflows without matching increase in exports and NRI remittances is bound to disturb balance of payments (BOP) situation.

All this call for proactive policy interventions by the Government. Before discussing the urgency for timely response, a look at the latest data would be in order.

The Reserve Bank of India (RBI) release dated 15th June 2018 shows that CAD increased to 1.9 per cent of GDP in 2017-18 from 0.6 per cent in 2016-17 "on the back of a widening of the trade deficit".

India's trade deficit increased to USD 160.0 billion in 2017-18 from USD 112.4 billion in 2016-17.Net FDI inflows in 2017-18 declined to USD 30.3 billion from USD 35.6 billion in 2016-17.

To avoid CAD's further growth, the Government should consider moderating avoidable imports such as gold imports. Simultaneously, it should look at factors such as bandhs and environmental-cum-judicial activism that lead to stoppages of mining and operation of manufacturing units. All such knee-jerk pressures necessitate imports.

The Government should also take a firm call on runaway rise in payment of royalty by subsidiaries to their parent MNC on account of technology transfer and brand use licensing. Reasonable payments are fine. They should, however, not become means for repatriation of income. Royalties reduce taxable income.

The foremost initiative should be revival of exports with annual growth rate of above 20 percent, which was attained & sustained during UPA regime. The exports grew by 34.47% in 2010-11.

It is here pertinent to remind Modi Government that it had itself set ambitious export target under Foreign Trade Policy 2015-2020 unveiled on 1st April 2015.

As put by FTP, "The vision is to make India a significant participant in world trade by the year 2020 and to enable the country to assume a position of leadership in the international trade discourse. Government aims to increase India's exports of merchandise and services from USD 465.9 billion in 2013-14 to approximately USD 900 billion by 2019-20 and to raise India's share in world exports from 2 percent to 3.5 percent".

What we have achieved is marginal growth in exports since the announcement of this target. The exports registered negative growth during first two years of Modi Government. They grew modestly by 5.17% in the third year, i.e. 2016-17 and by 9.5% in 2017-18 to 8 billion. A super giant leap to USD 900 million in span of remaining two years is next to impossible.

Similarly, the country's share in total world exports is expected to remain stagnant or nudge marginally. The target of 3.5% share, certainly can be written off as a wild dream.

To sum up, while external factors can't be avoided, they can certainly be managed to rein in CAD and trade deficit.


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