Current a/c deficit likely to balloon

On upswing in domestic demand, high crude oil prices.

A continuing upswing in domestic demand and high crude oil prices are likely to cause further deterioration in the current account deficit to between 2 per cent and 3 per cent of GDP for the current fiscal, compared with 1.36 per cent in 2005-06.

While the estimates are varied, analysts say the current account surplus in the fourth quarter of the last fiscal will be short-lived.

In a research report, JPMorgan said the country's balance of payments was experiencing major cross-currents.

Pointing out that the trade deficit has widened to a record high while capital inflows have been scaling new heights, it has forecast that the current account deficit will balloon to 2.6 per cent of the GDP ($21.6 billion) in 2006-07 and to 3.2 per cent of the GDP in 2007-08.

It adds that the trade deficit is poised to hit an all time high of 8.1 per cent of the GDP ($68.6 billion) in the current fiscal and widen further to almost 9.2 per cent of the GDP ($87.5 billion) next year.

NCAER Director General Suman Berry told Business Standard that in his view, a current account deficit of between 2 to 3 per cent of the GDP is not a cause for alarm.

"There is an adjustment in the distribution of surplus and deficit around the world that needs to take place if the United States is to reduce its current account deficit. Since the sources for financing now largely come from the private sector, it does present a continuing challenge for monetary authorities, but it is for precisely this reason that we have accumulated large stocks of reserves. So, for the present I do not see any serious cause for worry," he said.

It may be recalled that the current account deficit in 2005-06 was lower than estimates at about 1.36 per cent of the GDP ($10.61 billion).

A current account surplus of $1.81 billion in the fourth quarter had led to hopes that the deficit would not worsen to nearly 3 per cent of the GDP. ICRA, in its outlook for 2006-07, has estimated a current account deficit of close to 3 per cent of the GDP as "eminently possible".

"Given the positive outlook for investment and growth, and that oil prices will be somewhat higher, the value of imports is certain to expand at a fairly rapid pace," it said.