Current account deficit likely to rise to 2.5% of GDP in Q1FY19: ICRA

23 july 2018

ICRA expects the current account deficit to widen to USD 16-17 billion or 2.5% of GDP in Q1 FY2019, from USD 15 billion in Q1 FY2018, with a contraction in the net imports of precious metals and stones inadequate to stem the outflow related to higher crude oil prices.

Aditi Nayar, Principal Economist, ICRA, said, ”The trend of a YoY rise in the current account deficit is likely to continue for the seventh consecutive quarter in Q1 FY2019, driven by higher commodity prices and demand for imports of machinery and electronic goods, amid a contraction in exports of readymade garments, gems and jewellery and iron ore.”

Following the YoY surge in crude oil prices, India’s net import bill related to petroleum, crude and products increased by a sharp 50.1% to USD 22.5 billion in Q1 FY2019 from USD 15.0 billion in Q1 FY2018. Moreover, the merchandise trade deficit related to non-oil non-precious items recorded a moderate 11.9% rise to USD 15.8 billion in Q1 FY2019 from US$14.2 billion in Q1 FY2018, led by a sizeable rise in imports of items such as machinery, iron and steel, coal and electronic goods, amid a contraction in exports of readymade garments and iron ore. The impact of the same was partly absorbed by the 39.6% decline in net precious imports (imports of gold, silver, pearls, precious and semi-precious stones, less gems and jewellery exports) to USD 6.6 billion from USD 10.9 billion, respectively. The latter had partly been bloated by rebuilding the inventory of gold prior to the introduction of the Goods and Services Tax (GST) in 2017.

Benefitting from a weaker rupee, the services trade surplus has risen by a healthy 9.7% in April-May 2018 relative to the year-ago period. However, this translates into a moderate increase of USD 1.1 billion in absolute terms. Moreover, a weaker INR and higher crude oil prices are likely to have supported remittances in Q1 FY2019, which would prevent a sharper worsening of India’s current account deficit.

The widening of India’s merchandise trade deficit to a 61-month high USD 16.6 billion in June 2018, has fuelled concerns regarding the near-term outlook for the current account deficit. ”Unless commodity prices recede appreciably from the current levels, ICRA cautions that the monthly merchandise trade deficit may average USD 15.5-16 billion over the remainder of FY2019, resulting in a sombre outlook for the current account deficit,” Nayar added.

Notwithstanding the recent decline in gold prices, the base-effect led YoY contraction in gold imports in Q1 FY2019, is unlikely to sustain in the remainder of this fiscal, which would exert some pressure on the current account balance. Crude oil prices have demonstrated considerable volatility in recent sessions, impacting the outlook for the current account deficit and the sentiment towards the INR. Factoring in an average crude oil price of USD 75.0/barrel in FY2019 (~USD 56/barrel in FY2017) and a 6.0% rise in net import volumes, net oil imports are likely to rise to ~USUSD  98-100 billion in FY2019 from ~USD 69 billion in FY2018. India’s copper imports had jumped by 33.1% to USD 4.5 billion in FY2018 from USD 3.4 billion in FY2017. Following the decision of the Government of Tamil Nadu to shut down the copper smelter plant in Tuticorin, Tamil Nadu, because of environmental concerns, manufacturers in various sectors may have to resort to higher copper imports, which is likely to push up the annual import bill in FY2019.

”The impact of the intensifying risks related to global trade wars on Indian exports and imports remains unclear. Given the current level of commodity prices, ICRA expects merchandise exports and imports to expand by 10% and 13%, respectively, in FY2019, widening the merchandise trade deficit to ~USD 187-192 billion, from USD 160 billion in FY2018. However, the services trade surplus and remittances are likely to improve by 6-9% each in the coming fiscal, benefitting from a weaker currency. Nevertheless, we expect the current account deficit to increase to USD 67-72 billion or 2.5% of GDP in FY2019, from USD 48.7 billion in FY2018,” Nayar added.

Source: IRIS