Economic Survey 2018: Besides adversely impacting the economic growth and inflation, persistently high oil prices remain a key risk to the current account deficit (CAD), economists in the finance ministry said on Monday. The reduction in the trade deficit was the major contributor to bringing about an improvement in the CAD that declined from 4.8% in 2012-13 to around 0.7% in 2016-17.
Economic Survey 2018: Besides adversely impacting the economic growth and inflation, persistently high oil prices remain a key risk to the current account deficit (CAD), economists in the finance ministry said on Monday. “It is estimated that a $10 per barrel increase in the price of oil reduces economic growth by 0.2-0.3 percentage points and worsens the CAD by about $9-10 billion dollars,” chief economic adviser Arvind Subramanian said. India’s balance of payments situation, which has been benign and comfortable since 2013-14, saw CAD rising to 1.8% of the GDP in the first half of the current year as against 0.4% in the year-ago period. The reduction in the trade deficit was the major contributor to bringing about an improvement in the CAD that declined from 4.8% in 2012-13 to around 0.7% in 2016-17. According to Sajid Chinoy, chief India economist at JP Morgan, crude at $70/barrel will mean the prices are 20% higher than last year’s average. The CAD in FY19 could be $75 billion or 2.7% of the GDP, he said, adding that deficit above 2.5% is not considered sustainable.
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Trade deficit which had registered continuous decline since 2014-15, widened to $74.5 billion in the first half of 2017-18 from $43.4 billion in the same period last fiscal due to rise in oil and gold imports. India’s crude oil basket price has breached $60/barrel, beyond the comfort level of $55 for the country; international crude prices breached $70/barrel mark earlier this month. In the first three quarters of 2017-18, oil prices for India were around 16% higher in dollar terms than in the previous year while the IMF has projected global oil prices to rise 12%.
Subramanian blamed high crude prices due to a lack of enough shale oil output by US firms and proposed listing of the Saudi Arabian Oil Company (Aramco). On the positive side, the prospects for India’s external sector in this and coming year look bright, with world trade being projected to grow at 4.2% and 4% in 2017 and 2018, respectively, from 2.4% in 2016; trade of major partner countries improving and India’s exports growth also picking up, according to the the Economic Survey for 2017-18.
Foreign portfolio investment (FPI) increased by a whopping 78%, from $8.2 billion in the first half of FY17 to $14.5 billion in the first half of FY18, reflecting the positive outlook about growth potential of domestic economy.