Some Achhe Din on CAD Front for Fourth Quarter

Plunging crude oil prices has helped India narrow its CAD, but shrinking exports prevented it from turning positive.

A worker lifts a petrol nozzle. (Photo: Reuters)

Plunging petroleum crude prices in the global market helped India narrow its deficit on current account for the fourth quarter of 2014-15 to $1.3 billion or 0.2% of GDP, but shrinking exports prevented it from turning positive. India was widely expected to post a small surplus on the current account in the January-March 2015 quarter.

Nonetheless, the fall in oil prices helped contain India’s merchandise import bill, which in turn helped narrow the trade deficit at a time when exports contracted more than expected. India’s imports are traditionally much larger than its exports, and a wide trade deficit usually leads to deterioration of the current account deficit.

A Double-Edged Sword

A fall in petroleum price is always welcome especially when it has become like a double-edged sword – it cuts India’s import bill on one hand and exports earnings on the other. Petroleum crude and products are the largest items of India’s trade basket by value. Crude imports accounted for a little more than a quarter of India’s merchandise import bill in the last fiscal year while export of petroleum products brought in about a fifth of India’s merchandise export earnings.

Current account deficit is a broad measure of international trade. It represents outflow of net foreign exchange earnings from trade in goods and services, receipts of such repatriation of earnings by companies and institutional investors and remittances by non-residents. It is one of the key indicators that global rating agencies watch to assess the soundness of an economy. A statement released by the Reserve Bank of India on June 10 also said that the current account deficit for fiscal year 2014-15 had declined to $27.5 billion or 1.3% of GDP, down from 1.7% of GDP for the preceding year.

There was more happy news in the RBI data. India had a fantastic fourth quarter on the balance of payment front, with accretion to foreign exchange reserves rising by $30.1 billion, the highest ever in any quarter and accounted for almost half of the $61.4 billion accretion in the full fiscal year. The foreign exchange reserves growth was boosted by robust flow of portfolio and equity investments into the country – there was a big jump on both accounts in the fourth quarter as India appeared poised for accelerated growth and continued reforms measures.

No Room For Complacency

A worker holds up a palm full of gold granules.(Photo: Reuters)

Yet, there is no room for complacency. Some of these comforts are unlikely to be sustained in the current fiscal for several reasons. One, petroleum prices are volatile and have moved up in the last few weeks. It is unlikely to slip again to a level of $50 per barrel even though major oil producing countries have decided against cutting output.

Two, gold imports have been climbing with the softening of prices and easing of curbs on imports and this could put pressure on the trade balance. Third, with uncertainties surrounding monsoons, food imports, particularly pulses, look set to rise. Fourth, foreign investors have been selling shares to take profit due to uncertainties over monsoons and the reforms process. This will result in greater outflow of capital from the country. Fifth, any lifting of interest rates in the US poses a danger which could consequently lead to a flight of capital from India.

Given the emerging situation, India will need to hope that remittances by non-residents to the country and inflow of foreign direct investment into projects that are on ground remain strong. What is certain is that neither the current account is likely to record a surplus in the near future nor will accretion to foreign exchange reserves rise to record levels again in the next few quarters.

(The writer is a Delhi-based senior journalist.)