Unlikely to widen to 5% in third quarter as feared: economists; not all are convinced.
The rupee’s depreciating against the dollar will widen India’s current account deficit (CAD), but it would not be alarmingly high at over three per cent of the gross domestic product in the financial year, according to economists.
They also rubbish the apprehension expressed in certain quarters that the CAD will be 5 per cent of GDP in the third quarter of 2011-12. CAD is trade deficit plus balance on services trade with other countries, besides some investment income like royalty.
The first eight months of this fiscal saw trade deficit (difference between merchandise exports and imports) already crossing 116 billion dollars. It is all set to touch $150 billion, this fiscal.
While rupee depreciation has raised import bills, exports are not rising as much since overseas markets — particularly the US and Europe — are witnessing a slackening demand. Even so, the current account deficit in India’s case is not as high as the trade deficit, as the country usually has a good balance in invisibles (services).
For example, India’s trade deficit was as high as $35.4 billion in the first quarter of the fiscal, but the current account deficit was only $14.1 billion, according to RBI data. That is roughly 3.14 per cent of the GDP. India had $11.9 billion surplus in that period.
The Prime Minister’s Economic Advisory Council (PMEAC) has pegged CAD at 2.7 per cent of GDP this fiscal. However, PMEAC chairman C Rangarajan says CAD maybe higher than his council’s projection of 2.7 per cent of the GDP. “But not very much high”. To him, the rupee depreciation is a temporary phenomenon. “If capital inflows increase in the January-March quarter, then the pressure on rupee will ease,” he told Business Standard, alluding to last fiscal year’s trend.
As for 2010-11, the first quarter saw the CAD standing at 3.1 per cent of the GDP, before it was brought down to 2.6 per cent in the financial year. “Last year, too, we could tide over the possibility of a high CAD,” adds Rangarajan.
Also, capital inflows are likely to increase in the fourth quarter. Usually, foreign investors allocate funds for each country in the New Year. India being one of the fastest growing economies with a 7-7.25 per cent growth rate, foreign investors will allocate more funds, said Rangarajan. “This will help finance CAD easily.”
He concedes “pressure” building on the current account deficit in the third quarter of the fiscal, but says it is highly unlikely that the CAD will touch 5 per cent of GDP, as some fear.
Not all are convinced. Dun & Bradstreet’s senior economist Arun Singh says the deficit will widen, given the falling export numbers and rupee falling. CARE Ratings chief economist Madan Sabhanavis says CAD will be three per cent of GDP this year. “CAD is unlikely to go to five per cent of the GDP in October-December. Even 4 per cent is a danger mark.”
