India's current account deficit (CAD) is expected to remain largely steady at 16 billion to 17 billion dollars or 2.3 per cent of GDP in the first quarter (April to June) of the current fiscal year 2019-20 despite recent contraction in merchandise exports and imports, according to investment information firm ICRA.
This de-growth is likely to persist in the immediate term, given the year-on-year decline in crude oil prices and impact of recent customs duty hike on gold and precious metals.
Such factors in addition to the threat imposed by global trade wars as well as sluggish domestic demand are likely to restrict the overall growth of both merchandise exports and imports to low single digits. ICRA forecasts India's CAD to widen to 63 billion to 68 billion dollars in FY20 from 57.2 billion dollars in FY19 while remaining steady at around 2.1 per cent of GDP.
"The widening in the merchandise trade deficit is likely to be absorbed by a mildly higher services trade surplus and remittance flows in Q1 FY20," said ICRA's Principal Economist Aditi Nayar. "As a result, the CAD is expected to remain largely steady at 16 to 17 billion dollars or 2.3 per cent of GDP in the just-concluded quarter relative to 15.8 billion dollars in Q1 FY19."
Recently released data indicates that India's merchandise exports and imports contracted by 1.7 per cent and 0.3 per cent respectively in Q1 FY20.
"The prevailing year-on-year decline in crude oil prices and a temporary dip in gold imports following the tax changes introduced in the Union Budget may well result in a contraction in aggregate merchandise imports as well as exports in July 2019," said Nayar.
"However, both these factors will contribute to a sizeable reduction in the size of the trade deficit in July 2019 to about 16 to 16.5 billion dollars from 18.6 billion dollars recorded in July 2018, which was the highest monthly print for FY19," she said in a statement.
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An anticipated decline in the average price of the Indian basket of crude oil to 65 dollars a barrel in FY20 from 70 dollars a barrel in FY19, the risk related to global trade wars and signs of moderation in domestic consumption and industrial demand will exert a drag on the headline pace of expansion of merchandise exports and imports in the ongoing year.
Moreover, high gold prices may restrict growth in demand for imports of the precious metal. At present, ICRA anticipates that merchandise exports and imports will grow by a low two to three per cent and four to five per cent respectively in FY20. Nevertheless, with the pace of growth of inbound shipments likely to exceed that of exports.
ICRA expects the merchandise trade deficit to widen to about 193 billion to 198 billion dollars in FY20 from 180 billion dollars in FY18. A revival in gold imports closer to the festive season may push up the CAD size to 28 billion to 30 billion dollars in the second half of FY20, relative to the 21.5 billion dollars recorded in the second half of FY19.
Overall, ICRA expects India's CAD to widen at an absolute level for the third year in a row -- to 63 billion to 68 billion dollars in FY20 from 57.2 billion dollars in FY19 -- while remaining steady at around 2.1 per cent of the GDP.
A sustained pick-up in the price of crude oil, which appears to be an unlikely scenario at present, remains a risk to the CAD size. According to ICRA, every one dollar a barrel increase in the average price of crude oil in FY20 is likely to expand the CAD by about 1.6 billion dollars.