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High commodity prices to push current account deficit to 1.5% of GDP in FY22

High commodity prices to push current account deficit to 1.5% of GDP in FY22

After a surplus of 0.9 per cent of GDP in Q1, economists expect the current account to turn into a deficit in the second quarter of FY22 to around 1.3 per cent of GDP.

After falling for six straight weeks, Brent crude started rising last week and touched $75.87 a barrel on Friday After falling for six straight weeks, Brent crude started rising last week and touched $75.87 a barrel on Friday

The rising import bill on account of elevated global fuel and commodity prices is expected to widen the current account deficit (CAD) to around 1.5 per cent of gross domestic product in 2021-22 compared with a current account surplus of 0.9 per cent in the previous fiscal, according to economists. As Omicron fears recede, oil prices have started increasing again, which is expected to widen CAD. After falling for six straight weeks, Brent crude started rising last week and touched $75.87 a barrel on Friday.

After a surplus of 0.9 per cent of GDP in Q1, economists expect the current account to turn into a deficit in the second quarter of FY22 to around 1.3 per cent of GDP.
 
While exports grew by 50.7 per cent in the first eight months of the current fiscal at US$ 262.46 bn, imports have grown at a sharper 75.39 per cent to US $384.4 billion, leaving a trade gap of US $121.98 billion.

(Credit: Pragati Srivastava)

 "We expect import growth to exceed export growth, while higher losses in oil-led terms of trade imply that the current account-to-GDP will be in a deficit in FY22," said Emkay Global Financial Services in a recent report.  With our revised Brent forecast of $73.5 per barrel, our FY22 CAD-to-GDP estimate is 1.7 per cent, up from 1.1 per cent earlier, it added.

It added that healthy capital flows will ensure that the FY22 BoP will be a surplus of US$32 bn.

International brokerage firm Barclays also revised up the CAD forecast to 1.9 per cent of GDP this fiscal or US$60 billion, up from US$45 billion earlier.

"The trade deficit in the trailing three months has scaled up to a substantial US $65 billion, with imports exceeding US$50 billion each since Sept 2021. We now expect the current account deficit to exceed US$20 billion in Q3 FY2022, which could widen the full year figure to around US$40 billion or 1.2 per cent of GDP, said Aditi Nayar, chief economist, ICRA ltd.

CAD is the gap between the country's overall foreign receipts and payments. The current account deficit is usually financed by a capital account surplus. However, since the last quarter of 2019-20, India has been experiencing a current account surplus along with robust capital inflows leading to a balance of payment (BoP) surplus.

In November, trade deficit more than doubled to USD 23.27 billion as gold imports grew about 8 per cent to USD 4.22 billion and other inbound shipments like crude surged 132.44 per cent to USD 14.68 billion.

"We expect CAD in FY22 to be 1.5 per cent of GDP.  This is revised upward from earlier forecast of 0.7 per cent of GDP due to elevated commodity prices," said Devendra Kumar Pant, chief economist, India Ratings.

We expect the merchandise import volumes to recover further, as the economic activities picked up with the ebbing of COVID-19 cases in India,  improved vaccination rates, and the festive season, resulting in the merchandise import bill rising to an estimated US $150 billion in 3QFY22, said India Ratings in a note on Monday. "However, the surge in COVID-19 cases in key export destinations such as the EU and the US may keep the merchandise exports at around US $95 billion in 3QFY22. Therefore, the merchandise trade deficit is expected to come in at USD55 billion in 3QFY22," the note added.

Madan Sabnavis, chief economist, CARE Ratings said that the trade deficit is expected to widen as imports growth would push the trade balance. "Remittances to be sluggish which will hence lead to deficit in current account," said Sabnavis, who has estimated CAD at 1 per cent GDP.

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