Current a/c deficit to touch 30 billion USD in 2017-18

“ICRA expects higher oil and gold imports to enlarge India’s current account deficit to $30 billion (1.2 per cent of GDP) in 2017-18 from $20 billion in 2016-17 (0.9 per cent of GDP), arresting the trend of moderation recorded for four consecutive years since 2013-14,” the rating agency said in a statement here. However, the pressure related to the financing of a larger current account deficit would abate with the resumption of non-resident Indian (NRI) deposits in 201718, the statement said. 

“We expect a rise in the prices and import volumes of crude oil and gold to enlarge the Indian current account deficit. While merchandise exports may rise by 5-6 per cent in 2017-18, partly led by the higher value of commodity-intensive exports, global trends do not augur well for a significant improvement in the services trade surplus and remittances in 2017-18,” Aditi Nayar, Principal Economist, ICRA, said. 

Since 2013-14, a combination of lower crude oil and gold imports has helped curtail India’s current account deficit, absorbing the impact of declining merchandise exports, services trade surplus or remittances in some of these years.  This cushion would not be available in 2017-18, Nayar added.

ICRA’s baseline projection factors in a rise in the average crude oil price to $55 per barrel in 201718 from $48 per barrel in 2016-17, and a 7 per cent uptick in import volumes on the back of sustained domestic demand. 

Accordingly, net oil imports are expected to expand by 24 per cent to $67 billion in 2017-18 from $54 billion in 2016-17, emerging as the chief driver of the anticipated widening of the current account deficit. “The behavioural changes in purchase of gold after the note ban remain somewhat unclear. At present, ICRA expects a modest rise in imports in 2017-18 relative to 2016-17, particularly if healthy agricultural output boosts rural demand,” it said. 

“Assuming an average gold price of $1,250 per troy ounce, the value of gold imports in the coming fiscal is likely to increase by 17 per cent to $28 billion from $24 billion in FY 2017,” it added. The outlook for exports remains subdued, given the global political landscape, especially the upcoming elections in major European countries, Brexit negotiations and the US trade policy. 

Such uncertainty may curtail the growth of India’s merchandise exports in the coming quarters, despite the rise in the value of commodity-intensive exports. Moreover, the focus of the new US administration on promoting domestic industry and the proposed changes to the H1-B visa regime could hamper the growth of India’s services exports. 

In addition, the recent appreciation of the rupee is likely to weigh on the competitiveness of Indian exports in the coming quarters. “Global trends do not augur well for a significant improvement in the services trade surplus and remittances in FY 2018, from the levels in FY 2017,” it said. 

“Resumption of NRI deposit inflows, along with sustained healthy FDI flows, would abate the pressure related to the financing of a larger current account deficit in FY 2018. However, a high likelihood of tightening by the US Federal Reserve in its upcoming meeting, and the possibility of a hawkish outlook for future rate hikes, may limit the extent of FII inflows into emerging markets like India in the coming months,” ICRA said.