Does high current account deficit bring down the value of currency? Or does the depreciation of currency raise the current account deficit? Even as India’s policy-makers remain busy finding out the impact of one on another the current account deficit, after remaining low for the last five years, has begun to rise in the current year.
Current account deficit rises
India’s current account deficit is feared to widen to about 2.8% of gross domestic product in the current fiscal – the highest in six years – says a report by Nomura, the Japanese financial services major. High oil prices, a depreciating rupee and outflow of foreign portfolio investment are all affecting India’s trade balance. The report further states, “Balance of Payment (BOP) funding to remain a challenge in 2018-19 as the basic BOP (current account plus net foreign direct investment) is negative and portfolio flows also remain negative.” The current account deficit (CAD), which is the difference between the inflow and outflow of foreign exchange, increased to $48.7 billion, or 1.9% of GDP in 2017-18. This was higher than $14.4 billion or 0.6% of GDP in 2016-17. Nomura’s forecast of higher CAD in 2018-19 is reflected in the trade deficit in the first quarter of 2018-19. India’s current account deficit was estimated at $ 15.8 billion in Q1 of 2018-19 as compared to $ 15.0 in Q1 of 2017-18. This was 2.4% of GDP. The widening of the CAD was primarily on account of a higher trade deficit at $ 45.7 billion as compared with $ 41.9 billion a year ago.
If at 2.4% of GDP, the CAD was lower compared to 2.5% of the same quarter of 2017-18, the up-trend is clearly visible when a long term trend is looked at. During the last seven quarters only once, in April-June 2017 quarter the CAD was higher than the Q1 of the current year.
Maybe at 2.4% or even at 2.8% of GDP, the CAD figure would not pose an immediate concern for the North Block, but if one remembers the story of 2012-13 when it spiralled to over 5% of GDP, the rising trend of CAD would need a serious look.
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