The finance ministry is preparing a set of measures to reduce the current account deficit (CAD), which reached the highest-ever level of 4.5% of GDP at $21.7 billion in January-March quarter of 2011-12. The issue of rising CAD was discussed at a meeting of senior finance ministry officials on Tuesday. R Gopalan, secretary in the department of economic affairs (DEA) in the ministry, has asked his officers to prepare projections for CAD for the next couple of years, sources said.
The department has also been asked to analyse the impact one dollar increase or decrease in the international oil prices would have on the CAD, the sources said.
The exercise is being done to short-list the policy options available for addressing concerns related to the country’s balance of payments (BOP), CAD and merchandise trade deficit. The government has recently hiked the limit on FII investments in government securities to attract capital inflows, which help in financing the CAD.
To ease the pressure on the current account, the finance ministry in March doubled the custom duty on gold imports to 4%. Higher imports of gold and oil have been adding to the country’s rising CAD. For the entire financial year 2011-12, CAD stood at an all time high of 4.2% of GDP at $78.2 billion. CAD was $46 billion or 2.7% of the GDP in 2010-11.
CAD represents the difference between exports and imports after considering cash remittances and payments. This deficit is financed by surplus on the capital account.
High crude prices inflated India’s oil import bill to $155.64 billion in 2011-12, up 47% from a year ago and contributing 30% of total imports. Gold and silver imports rose 44% to $61.5 billion in the same year.
Lower crude oil prices would help in reducing India’s CAD. But depreciating rupee, which has fallen over 20% vis-a-vis the dollar in the last one year, negates the positive impact that falling crude oil prices have for India.
A $1 per barrel change in crude oil prices impacts the CAD by $900 million, Citi India said in a research note last month. All our macro forecasts incorporate crude oil at $125 per barrel.
Thus, if crude averages $105 per barrel, the CAD would drop by $18 billion. This would take the current account deficit to $59 billion (3% of GDP) vs our current estimate of $77 billion (4% of GDP) in 2012-13, it said.
