Current account comes under pressure from oil, gold and coal imports

However, current account deficit won't be unmanageable as was the case in 2011-13, say experts

Global crude prices have started ballooning again, contributing significantly to widening of the trade deficit. In fact, the deficit expanded to a record high of $22.59 billion in September. Petroleum imports soared to $17.4 billion in September against $11.6 billion in the previous month.

The reasons for such a spike in petroleum imports is the hardening of international prices and increase in demand in the domestic markets, as Covid-induced lockdowns began easing. The global price for the Indian basket of oil was $73.13 a barrel this September, against $41.35 a year ago.

Gold imports have also been impacting the deficit in the recent past, even as inbound shipments declined to $5.1 billion in September from $6.7 billion in the previous month. Besides, Coal imports began showing a slight upward tendency due to shortage in domestic markets. They rose to $2.2 billion against $1.9 billion over this period.

Petroleum imports stood at $72.9 billion in the first half of the current financial year, constituting 26.4 per cent of the total import bill.

On the other hand, gold imports were worth $23.6 billion, or 8.5 per cent of the bill and inbound shipments of coal were worth $12.6 billion (4.6 per cent).

Impact on current account deficit

Will these imports lead to unmanageable current account deficit (CAD) as was the case in 2011-12 and 2012-13? CAD figures for the second quarter of the current financial year aren't out yet, but the current account was in surplus to the extent of 0.9 per cent of GDP in the first quarter. In all of 2020-21, it was in surplus to the extent of 0.9 per cent of GDP. 

Partly due to this and because exports have been rising at a hectic pace, economists do not believe that CAD will rise as high as in the early part of the previous decade. CAD had risen to 4.2 per cent of GDP in 2011-12 and then further to 4.8 per cent the very next year.

Exports were up 22.6 per cent in September year-on-year, even as the growth dropped from 45.6 per cent in August. Exports were also higher at 29.9 per cent compared to September 2019.

Says Ranen Banerjee, leader-economic advisory services, PwC India,"There will be a pressure on CAD given the high prices of coal and oil. However, it is unlikely to reach the levels we had experienced in 2011-13."

Aditi Nayar, chief economist at ICRA, said she expected the CAD to remain under one per cent of GDP as exports have shown a resounding performance.  

However, Soumya Kanti Ghosh, SBI group chief economic advisor, said it all depends on exports. "If exports stagnate, it could be," he said in response to a query whether CAD will rise to unmanageable levels.

Banerjee also said the impact of crude prices gets mitigated to an extent, as India's export basket also has a high component of oil products exports. The exports are quite buoyant for India at this time and much higher than what was seen in 2011-13.

For instance, while there were $17.4 billion worth of petroleum imports in September, India exported $5.2 billion of petroleum too. The deficit of $12.2 on this count was roughly half the total trade deficit in September.

For the first half of the current financial year, exports grew 57.5 per cent at $197.9 billion, which means almost half the target of $400 billion for the entire year has been achieved.

On the other hand, imports rose by 81.7 per cent to $276.02 billion during the same period.

As such, the trade deficit stood at $78.1 billion during April-September of 2021-22.

However, if services are considered, India exported $114.6 billion of the items in the tertiary sector. On the other hand, it imported $65 billion of services. This left a surplus of $49.6 in services trade.

As such, the overall deficit in merchandise and services trade was $28.6 billion in the first half of the current financial year. This, together with transfers and certain investment incomes, such as royalty, will constitute the current account balance for the first half.

Divakar Vijayasarathy, founder and managing partner, DVS Advisors LLP, said the current account is expected to be negative for FY22 but is likely to be only around 0.9-1.25 per cent of GDP.

"This is because the current account for the first quarter was positive," he said.

Vijayasarathy said with the increase in the pace of vaccination across the globe, export demand is expected to increase, helping in further narrowing down CAD.

If one looks at the situation of CAD in 2011-13, it was primarily gold which was the main culprit. Gold imports stood at $56.4 billion in 2011-12, constituting 11.5 per cent of total imports. Next year the share went down a bit to 10.9 per cent with the imports of gold standing at $53.6 billion. The next big culprit was coal which constituted 3.5 per cent of total inbound shipments in each 2011-12 and 2012-13 at $17.4 billion and $17 billion respectively.

Petroleum was relatively a small fry in the CAD game. It accounted for 3.2 per cent of total import bill in 2011-12 at $15 billion in 2011-12 and 3.3 per cent at $16.4 billion next year.

One of the reasons for widened CAD was also lackluster performance of exports in 2012-13, even though it was not the case in the previous year. While exports rose 22.5 per cent in 2011-12 at $305.9 billion, it was down 1.8 per cent at $300.4 billion the next year.

Table: Current account deficit: A comparison between the past and recent years

Year	2010-11	2011-12	2012-13	2013-14	2018-19	2019-20	2020-21	2021-22*
Petroleum	10 (2.9)	15 (3.2)	16.4 (3.3)	16.4 (3.3)	140.9 (27.4)	130.5 (27.5)	82.5 (21.0)	72.9 (26.4)
Gold	40.5 (10.9)	56.4 (11.5)	53.6 (10.9)	28.7 (6.4)	32.9 (6.4)	28.2 (5.9)	34.6 (8.8)	23.6 (8.5)
Coal	19.8 (2.6)	17.4 (3.5)	17 (3.5)	16.4 (3.6)	26.2 (5.1)	22.4 (4.7) , 16.3 (4.1),  12.6 (4.6)	.	.
CAD	48 (2.7)	78.1 (4.2)	88.2 (4.8)	32.3 (1.7)	57.2 (2.1)	24.6 (0.9)	-23.9 (0.9)	.

Notes:
1. Figures in $ billion, except where indicated
2. Negative CAD implies surplus in current account balance
3. * is for H1,
4, Figures in brackets for petroleum, gold and coal are % of total import bill and for CAD are % of GDP

5, Source: Commerce department, RBI