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Quick Take | The rising current account deficit is not just because of high oil prices

While the deficit on account of petroleum, oil and lubricants (POL) went up by 58 percent from a year ago, the deficit on account of non-POL products rose by 50 percent

December 10, 2018 / 01:17 PM IST

Everybody knew India's current account deficit would go up because of high oil prices. The CAD rising to 2.9 percent in the July-September quarter from 2.4 percent in the previous quarter was hardly a surprise.

But is the rise in deficit entirely due to high oil prices? Not really. While the deficit on account of petroleum, oil and lubricants (POL) went up by 58 percent from a year ago, the deficit on account of non-POL products rose by 50 percent. Clearly, it's not just oil that's driving up the current account deficit.

This is seen more clearly if we consider quarter-on-quarter numbers. The POL deficit sequentially went up by a mere 1.3 percent in the July-September quarter this year. But non-POL deficit was up 17.5 percent over the same period.

Non Oil Deficit

There are two reasons for this trend. The first is that non-POL goods exports have been sluggish, rising by a mere 6.3 percent from a year ago. The other is that non-POL goods imports have been strong, rising 15.8 percent year on year.

Close

To be sure, the fall in crude oil prices will help lower current account deficit as a percentage of GDP. But we also need to boost exports. The government has already taken a series of protectionist measures to restrict imports, but the real question is why domestic demand is leaking into imports. Is our industry not competitive enough? Also to be kept in mind is that as the business cycle turns, capital expenditure will rise and that will lead to more imports.

That said, the bright spots in the Balance of Payments (BoP) numbers were increased remittances from workers abroad and higher income from the export of computer services.
Manas Chakravarty
first published: Dec 10, 2018 09:58 am

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