The current account deficit (CAD) had widened to 1.3% of GDP at the end of September from a surplus of 0.9% in June. And it is expected to widen further in the December quarter because the net exports ratio – an underlying indicator for CAD – has reached a three-year high.
Exports in February grew 22.36% to $33.81 billion and imports 34.9% to $55 billion, widening the trade deficit to $13.12 billion. Engineering, petroleum and chemicals pushed up exports during the month, and imports were driven by the surge in crude oil prices. If merchandise trade stays on its impressive trend, India could end 2021-22 with exports in excess of $400 billion and upwards of $600 billion in imports, and a trade deficit of $200 billion. There will, of course, be an impact of the ongoing Russia-Ukraine war on cargo shipments to and from India. It would play through higher energy prices threatening what has been a fragile economic recovery.
The current account deficit (CAD) had widened to 1.3% of GDP at the end of September from a surplus of 0.9% in June. And it is expected to widen further in the December quarter because the net exports ratio – an underlying indicator for CAD – has reached a three-year high. Beyond that, the war in Ukraine and ensuing sanctions by the western countries are likely to keep India’s fuel bill inflated, keeping up the pressure on the current account. If oil prices stay elevated for an extended period, chances are India, which imports 85% of its crude and nearly half its gas, will see its CAD move into worrisome territory by March next year.
In its latest review of monetary policy, the Reserve Bank of India (RBI) saw strength in the country’s burgeoning foreign exchange reserves and a manageable CAD. Booming services exports, led by information technology (IT), and healthy foreign direct investment (FDI) inflows were expected to keep the CAD within the comfort zone of policymakers. The case for India’s ability to handle a flight of capital as oil prices surge and central banks begin monetary tightening rests on this premise. Some of that will be put to the test during the forthcoming drawdown of global liquidity. The Russia-Ukraine conflict in Europe will play out in the Indian economy through inflation, worsening trade balance and a falling rupee. Heads need to be up for that.