India’s current account deficit (CAD) widened to possibly its highest level in almost a decade in the April-June quarter, as per a Reuters poll. Factors such as soaring global commodity prices and biggest capital outflows since the global financial crisis of 2008 have had a major impact on the trade gap, the poll highlighted.
Moreover, the Indian rupee touching near a record low of around 80 to the US dollar, has only worsened the grim situation.
Findings by other agencies reflect a similar upheaval. Credit rating agency India Ratings and Research (Ind-Ra) expects the CAD to have widened to $28.4 billion (3.4% of GDP) in 1Q FY23, as against a deficit of $13.4 billion (1.5% of GDP) in 4Q FY22. As a share of GDP, this shows a 36-quarter high of 3.4% of GDP in 1Q FY23, the agency said in its latest press release.
Ind-Ra anticipates merchandise imports to remain robust due to elevated global commodity prices and weak rupee. Merchandise exports, on the other hand, are likely to slow down and come in at $104.2 billion in 2Q FY23 due to the global headwinds. This also draws from GDP forecasts of some of India’s key exporting destinations such as the US, Eurozone and China that have been revised downwards. “This may put India’s exports targets of $750 billion (goods and services) for FY23 in jeopardy. All in all, Ind-Ra expects the merchandise trade deficit to come in at a fresh high of around $87 billion in 2Q FY23,” the release stated.
What does this mean for India’s economy and exports? Sunil Sinha, Senior Director and Principal Economist, India Ratings and Research says though India’s CAD in the range of 2.5%-3% is manageable given the current forex reserves, we need to focus on exports to keep it under control. “This is the challenge right now. Exports did very well in the last fiscal but are showing signs of slowdown. On the other hand, if our import bill keeps increasing, the trade deficit will widen. Due to global factors, advanced economies are staring at recession. In a way that is windfall gain as our oil import bill will be lower, but it will also mean that we won’t be able to ramp up exports. So, it is a double-edged sword for us,” he says.
Prices of energy, non-energy and precious metals increased 85.6% y-o-y, 18.3% y-o-y and negative 0.4% y-o-y, respectively, in 1Q FY23. Within non-energy, the prices of items such as fertilisers, base metals, and oils & meals rose 113.6%, 12.3% and 27.2% y-o-y, respectively, in the same period, the Ind-Ra release stated.
Industry experts feel that a more long-term view needs to be taken of this situation. Arun Maira, former member of the Planning Commission and the former India chairman of Boston Consulting Group (BCG) says wanting to be a net exporter like China implies making our own capabilities very strong. “We are importing a lot of things. We can look at building capabilities in industrial goods. One must strive to have all resources in the country as it helps to serve other purposes, increase employment as well as demand. People will learn better and India will become a more attractive investment,” he explains.
Maira does admit that in certain areas, there is no option other than to import. “For instance, petroleum products, chemical processing industry which require petroleum feedstock. But we can reduce imports in areas where capabilities can be substituted. Hydrocarbons, for example, also goes to generate power and transport equipment. In Europe, suddenly gas prices and petroleum prices have gone up. Look at what is going on in their economies on the energy side. One must take bigger structural steps and have sources of energy that are not dependent on hydrocarbons. In transport equipment, look at alternate forms of combustion and propulsion,” he states.
Merchandise imports, which grew 40.5% y-o-y during July-August 2022 to $128.2 billion, is expected to come in at $192.2 billion in 2Q FY23, increasing by 30.3% y-o-y as per Ind-Ra.
Ajay Sahai, DG & CEO, Federation of Indian Export Organisations (FIEO) says that atleast 2/3rds import in commodities like petroleum, fertiliser and edible oil is essential for the economy. “The elbow room is to reduce 1/3rd of the import. The long-term roadmap should be to look at compressing imports. The government has also asked states to reduce imports and for that, competitive manufacturing would be necessary. The National Logistics Policy (NLP) is a step in the right direction and will help improve efficiencies,” he says.
Explaining how services exports may help to offset the headwinds visible in merchandise trade, Sahai adds that they can offer the necessary cushion both on trade deficit and current account deficit. “With economies opening up, we expect that the travel & tourism and aviation industry would help us to increase our services exports significantly besides other sectors,” he states.