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The country’s current account deficit (CAD) in 2013-14 will come down to 4.7 per cent of gross domestic product (GDP) from the estimate of a record 5.1 per cent in 2012-13, said the Prime Minister’s Economic Advisory Council (PMEAC) on Tuesday.
This would happen, it said, on a moderation of gold imports, a 10.8 per cent rise in merchandise export and a slightly higher export of services. Its report doesn’t leave this to chance but asks the government to take measures for ensuring this.
This projection of CAD for 2013-14 is optimistic compared to that of the International Monetary Fund, which pegged it at 4.9 per cent.
In its Review of the Economy 2012-13, the council asked the government to contain gold, oil and coal imports to rein in the rising CAD. According to the latest Reserve Bank of India data, the CAD rose to a record 5.4 per cent of GDP in the first nine months of 2012-13, against 4.1 per cent in the corresponding period of 2011-12.
The Council said the trade deficit would be $213 billion in 2013-14 against $200 bn in the previous year (on Balance of Payments basis which varies from the commerce department data). As a percentage of GDP, the trade deficit would be 10.9 per cent of GDP in 2012-13 and 9.9 per cent in 2013-14.
Gold and silver imports are projected to come down to $45 bn in 2013-14 from $56 bn in 2012-13, on a declining in prices and volume. The net oil bill would, however, widen the trade deficit by rising to $125 bn from $110 bn, on rising prices. The Council expects global oil prices to rise four per cent in 2013-14. "Once again, the increase in the net oil import bill will be driving the overall increase in the merchandise trade deficit," its report said.
Net investment income might also adversely impact the CAD, as net invisibles’ earnings are estimated to come down to 5.3 per cent of GDP at $113 bn in 2013-14 against 5.7 per cent of GDP, at $105.8 bn, in the previous financial year.
Given weaker than expected earnings by information technology (IT) companies, the PMEAC had factored in a smaller expansion in IT-enabled services (ITeS) than the one of 10-12 per cent given in the forecasts by major companies. It expected ITeS and remittances to bring in $141 bn in 2013-14, compared to the estimated $128 bn of 2012-13, a growth of 10 per cent.
However, the negative balance on net investment income is expected to increase further to $28 bn in 2013-14.
Riders
There is a caveat on the PMEAC projections for the FY14 CAD, regarding gold imports. It had initially projected these to fall to $44 bn in 2012-13 but now expects this to touch $56 bn. The second downside risk is merchandise exports repeating the performance of 2012-13, which means these outbound shipments contract in 2013-14, rather than showing growth. Among other risks are a sharper spurt in global oil prices due to military conflict in West Asia and lower services exports.
To contain the CAD to $90-95 bn (4.2 to 4.4 per cent of GDP) and to reduce it to 3-3.5 per cent of GDP in 2014-15, the Council says many steps have to be taken on the import side regarding coal, gold and oil. Gold imports, it says, need to be cut by another $5 bn, so that it does not exceed $40 bn. And, price reforms are needed for net oil imports to be lower by $2-3 bn. The report also said the production should be raised to reduce thermal coal import by $2-3 bn in 2013-14. India’s coal import had risen 40 per cent, from 75 million tonnes in 2009-10 to 105 mt in 2011-12, and doubled in value, from $9 bn to $18 bn.
Capital Inflows
To finance high CAD, the council wants the government to encourage foreign capital inflows. It pegged foreign direct investment at $36 billion this year on the back of supportive policies. In the first nine months of 2012-13, India received foreign inflows worth $21 billion, lower than $29 billion in the corresponding period of 2011-12.
