Current account deficit pips inflation as India’s major challenge at the moment: Analysts

Current account deficit poses a bigger challenge to the Indian economy than does the rising inflation, according to analysts.

Speaking to CNBC-TV18, Sonal Varma of Nomura Financial Advisory & Securities (India) and Chetan Ahya of Morgan Stanley said that the slowdown in developed economies such as the United States and European Union will lead to India’s export numbers coming down, resulting in an increase in the country’s current account deficit.

“The broader view is that the current account deficit for the next six months remains around 4 percent of GDP and 3.3 percent for the full financial year,” said Varma.

The decline in consumption in the US since the pandemic will have a negative impact on India. “What we had seen during the pandemic is that there was an excessive growth in demand for goods from US consumers specifically. That is going to come back to haunt us with much weaker demand for exports,” said Ahya.

India’s current account deficit for FY22 widened to $38.7 billion (1.2 percent of GDP) from $23.7 billion (0.9 percent of GDP) in FY21.

Although the pressures remain towards currency depreciation, both the analysts agree that the Indian Rupee is not a terrible performer. Speaking on the currency’s performance, Varma said, “I don’t think this is clearly different from 2013. India and INR does not stand out in Asia for depreciating more. So it's very much in line with expectations. We expect further depreciation to around 82 by September and around 81 by December.”

While both analysts agree that Europe will enter into a recession this year, they differ on the US. Nomura expects the US to enter into recession this year as its economy contracts by one percent. Meanwhile, Morgan Stanley expects the US economy to enter a deeper slowdown rather than recession.

“For the US we are expecting a deeper slowdown, not recession, though we see that the recession risks are rising. We expect to see the gross going down to 0.9 percent on a YoY basis in the fourth quarter,” said Ahya.

The slowdown in developed economies could cut down India’s growth, according to Varma. “Our view is over the next 12 months, the export cycle, the investment cycle will start to move lower. So we have cut 2023 calendar year growth in GDP for India from around 5.5 percent to about 4.7 percent.”

However, the fall in commodity prices and India’s ability to generate domestic demand could help it weather the storm. “India is highly dependent on commodity imports, and commodity prices have already fallen off quite aggressively. Non-oil commodity prices have fallen by 20% to 40% and oil prices are also coming off now,” said Ahya.

“India is one of the countries with the ability to generate domestic demand, and it is domestic demand oriented. So on a relative basis, we pick India as the number one country in the region to be with when the global economy is not going great,” he added.