Exports contraction not a big worry for India’s Current Account Deficit; two key factors give cushion

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Updated: July 18, 2019 5:19:59 PM

The recent massive contraction in exports by almost 10 per cent on-year in the month of June may have sent alarm bells ringing to the economy hawks, but is still not enough to upset India’s current account deficit.

CAD, current account gap, trade deficit, remittances, gold duty, imports, exports, merchandise, services, ICRAIndia’s current account deficit for the fiscal first quarter April-June is expected to remain at 2.3 per cent of GDP (Bloomberg image)

The recent massive contraction in exports by almost 10 per cent on-year in the month of June may have sent alarm bells ringing to the economy hawks, but is still not enough to upset India’s current account deficit, which a rating agency expects to remain in line with expectations. India’s current account deficit for the fiscal first quarter April-June is expected to remain at 2.3 per cent of GDP, notwithstanding the recent contraction in merchandise exports, ICRA said in a report on Thursday. To the rescue are two key factors – a surplus from services and the rise in remittances providing support to the current account gap of India.

Further, both exports and imports will remain contracted in the short term due to the decline in crude oil prices and a hike in customs duty on gold, according to ICRA. The agency has also predicted that the overall growth of exports and imports will remain in single digits for the current financial year, due to decreasing demand amidst global trade tension. ICRA forecasts the current account deficit for FY20 to widen to USD 63-68 billion, remaining steady at 2.1 per cent of GDP. 

“The widening in the merchandise trade deficit is likely to be absorbed by a mildly higher services trade surplus and remittance flows in the first quarter. As a result, the current account gap is expected to remain largely steady at USD 16-17 billion or 2.3 per cent of GDP in Q1 FY20, compared to USD 5.8 billion in Q1 FY19”, said Aditi Nayar, Principal Economist, ICRA.

Indian exports decreased by 1.7 per cent and imports contracted by 0.3 per cent in the first quarter. An estimated reduction in the average price of the Indian basket of crude oil by USD 5 per barrel, global trade tension, and moderate sentiments in consumption and demand would affect the expansion in exports and imports in the current year. 

ICRA anticipates the merchandise exports and imports to grow by a mere 2-3 per cent and 4-5 per cent, respectively, in the current year. Eventually, the agency expects the trade deficit to widen to USD 193-198 billion in FY20 from USD 180 billion in FY19.

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