India may have missed turning current account surplus after 12 years due to all-time low crude oil prices

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Published: June 22, 2020 7:21 PM

Oil imports rose by 3.7 per cent to USD 33.7 billion in Q4 FY20 from USD 32.5 billion in the same period a year ago.

current account, current account deficit, trade deficit, The dramatic fall in trade activity had seen both imports and exports falling substantially, bringing India this once-in-a-blue-moon opportunity.

India’s hunger for imported energy might have cost India a chance to swing its current account into surplus in the January-March 2020 quarter, for the first time in 12 years. The government had expected that a sharper fall in India’s imports in the last quarter of the last financial year 2019-20 would help generate a current account surplus for India. The dramatic fall in trade activity had seen both imports and exports falling substantially, bringing India this once-in-a-blue-moon opportunity. However, India imported a huge amount of crude oil in March to take advantage of low crude oil prices and to fill strategic reserves to full capacity, preventing imports from falling in line with the suppressed domestic economic activity.

“Oil imports rose by 3.7 per cent to USD 33.7 billion in Q4 FY20 from USD 32.5 billion in the same period a year ago, partly on account of a rise in the volume of oil imports in March 2020 to take advantage of subdued international crude oil prices,” Aditi Nayar, Principal Economist, ICRA, told Financial Express Online. As a result, the merchandise trade deficit narrowed only slightly to $34.8 billion in Q4FY20 from $35.8 billion in Q4FY19, Aditi Nayar added.

In fact, ICRA expects a mild increase in the current account deficit to $5.5-6.5 billion or 0.8 percent of GDP in Q4 FY20, from $4.6 billion in Q4 FY19, Aditi Nayar further said. Another economist Madhavi Arora recently pegged the current account deficit at 0 percent of GDP in Q4FY20, taking into account high frequency trade indicators. Due to the global demand shock, export growth may continue to remain fragile, Madhavi Arora, Lead Economist, Edelweiss FX and Rates, said in a report.

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The current account records a country’s transactions with the rest of the world and includes net trade in goods and services, net earnings on cross-border investments, and net transfer of payments, over a defined time duration.

The government’s macroeconomic report expected that India’s current account balance may generate a small surplus in the first quarter of FY 2020-21 too, supported partially by low levels of external debt servicing. The report said that India’s external sector has acquired resilience manifested in improvement in Balance of Payments (BoP) position despite being challenged by net FPI outflows for some time. If the country’s current account turns positive, it will be for the first time in the last 12 years. The last time India’s current account turned positive was in Q4 FY07 at $4.2 billion.

On the other hand, economists’ most optimistic estimates put the current account surplus to the tune of only 0.7 per cent of GDP, which they say is not something to cheer, as it would be brought about by depressed trade and the lockdown. SBI Research and Barclays have projected a current account surplus of $19 billion or 0.7 per cent of GDP in FY21. Sameer Narang, Chief Economist, Bank of Baroda also told Financial Express Online that the trade deficit in Q4 was just $1 billion lower than Q4 of the last year when CAD was $4.6 billion, however it is very likely that CAD will be positive in Q1 FY21.

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