Current account deficit: imports are under scrutiny due to the expansion of CAD

The government has begun to monitor imports closely amid concerns about the widening current account (CAD) deficit, which could undermine India’s macroeconomic balance.

A senior government official said fiscal authorities were vigilant after the trade deficit hit a record $24.3 billion in May, but ruled out any knee-jerk reaction that could impact the ongoing economic recovery.

“We’re watching closely…Officials have been asked to look at the import data,” the official said, adding that CAD is an area of ​​concern.

The import of precious metals, especially gold, is under scrutiny. Gold imports rose about ninefold year-on-year in May 2022 to $7.7 billion, while silver imports rose to $556 million.

Forex Reserve provides cushion

A year ago it was $15.4 million. The non-fuel imports that have seen high growth are electronic goods, leather and leather goods, and textiles.

India has in the past imposed restrictions or increased tariffs to limit the importation of certain commodities. However, such brakes could weaken economic growth, which has held up in the current fiscal year despite many headwinds.

India’s current account showed a deficit of 1.2% of GDP in FY22 versus a surplus of 0.9% in G21 as the trade imbalance widened to US$189.5 billion from US$102.2 billion a year earlier. Fitch Ratings had earlier this month said the CAD could rise to 3.1% of GDP in FY23. The Ministry of Finance also drew attention to the subject in its most recent monthly report.

“India faces near-term challenges in managing its fiscal deficit, sustaining economic growth, curbing inflation and curbing the current account deficit while maintaining a fair value of the Indian currency,” it said.

Although the FY22 fourth-quarter deficit came in below expectations, it remains a cause for concern amid strong portfolio outflows, economists said.

CAD for the quarter ended March fell to $13.4 billion from $22.2 billion in the previous quarter, but was up from $8.1 billion in the same period last year.

“Concerns remain, especially given elevated commodity prices,” he said

Chief Economist Aditi Nayar. “We project a deficit of $100 billion this fiscal year, just below the worrying 3.0% of GDP threshold.”

India’s foreign exchange reserves of US$591 billion provide a good cushion, but a prolonged period of high crude oil and commodity prices may erode that comfort. A high and expanding current account balance can lead to capital outflows, sharp currency depreciation and increased imported inflation.

Leave a Reply

Your email address will not be published.