Pull out the champagne; current account deficit trounced
Current account deficit as a problem is over. Rupee depreciation, lower GDP growth and the drive against gold have killed this problem. The fight must now shift to fiscal deficit.
October 10, 2013 / 19:45 IST
The trade deficit for September coming in at US Dollar 6.7 billion makes one thing clear- we have nearly squashed the current account deficit crisis. Here’s why.
Let’s start with the April –June current account. That quarter trade deficit was USD 51 billion; non trade inflows on the current account, including software exports, remittances by Indians living abroad and other such flows were a net USD 30 billion. After subtracting the USD 30 billion inflows from the USD 51 billion trade deficit, the current account deficit stands at USD 21 billion or 4.7 percent of GDP.Now in Q2, the trade deficit amounts to USD 30 billion (USD 12.3 billion deficit in July, USD 10.9 billion in August and USD 6.7 billion in September). It is safe to assume that non trade flows like software exports, remittances etc will remain stable at USD 30 billion. This means for Q2, India’s current account deficit may be zero or at best a couple of billion dollars.The internals of falling trade deficit are important. Imports in September are down 18 percent on year, they are down 6 percent from August. Imports have been falling for three straight months. Exports are up 11 percent on year and about 4 percent over August 2013. Exports have been rising by double digits since June. Engineering, pharma, chemicals and textiles are all doing well in the export markets and are most likely to continue even if there is a slight slowdown in the US because the currency makes our exports much more competitive. Likewise currency has also been responsible for the continued fall in imports.Gold imports at USD 800 million are negligible compared with the USD 4.6 billion of imports last September. To be fair, this may rise in the current quarter. But look at the tally. Given a USD 21 billion current account deficit in Q1 and zero current account deficit in Q2, even assuming we get a USD 10-12 billion current account deficit in Q3 and Q4, the annual trade deficit will be in USD 45- 50 billion range only. At USD 50 billion, the annual current account deficit is 2.7 percent. I would wager we may end lower…may be 2.5 percent. Current account deficit, as a problem, is over. Rupee depreciation, lower GDP growth and the drive against gold have killed this problem. The fight must now shift to fiscal deficit. If we don’t slay this monster even half as effectively as we slayed current account deficit, consumer inflation will remain at 9 percent and the hard won gains on bringing stability to the rupee will all be lost. Fiscal deficit is today’s and tomorrow’s problem. Let’s shift-ho. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
