India's Nine-High Year High Current Account Deficit Set to Worsen Further: Deloitte Report
New Delhi: India's current account deficit (CAD), which is already at a nine-year high, is set to worsen further going forward due to the current scenario of higher imports and slower exports, Deloitte warned in a report, according to Mint.
While noting that the pressure on the rupee is "worrisome", the Deloitte report pointed out that India may consider restricting import of non-essential items besides looking for cheaper import options.
The Indian Express had reported that the government is planning to increase import duties on all non-essential items for which there is enough manufacturing capacity in India.
In last year’s budget, finance minister Nirmala Sitharaman had hiked import duties on daily use items such as umbrellas, headphones, earphones, loudspeakers, smart meters, and imitation jewellery. Basic customs duty on solar cells and solar modules was also hiked in 2022, to reduce India’s reliance on imports and create a domestic solar manufacturing sector.
However, raising import duties on non-agricultural products, a trend that has made a comeback during Narendra Modi's tenure, is being termed as a "protectionist" move. Several experts, including former Reserve Bank of India governor Raghuram Rajan, had cautioned against import substitution under the 'Aatmanirbhar Bharat' initiative, saying the country has gone down this route earlier but could not succeed.
The Deloitte report further stated that India's inflation levels will continue to remain high in the near term, forcing the RBI to keep a tight control on monetary policy. Consequently, this could adversely affect consumption and investments, thereby moderating demand.
"India’s current account is expected to worsen relative to other nations… India is expected to witness a very high CAD. It is the only nation expected to see a sizeable rise in CAD due to higher imports and slower exports… The pressure on rupee is worrisome and India could deal with the situation by restricting imports of non-essentials or looking for alternative cheaper import destinations... Keeping an eagle eye on two ‘I’s will be imperative – inflation and INR," said Deloitte report, according to Mint.
Also read: Why 2023 Promises to Be a Rough Year for India’s External Sector
India's CAD jumped from 2.2% of the Gross Domestic Product (GDP) in the quarter ending in June 2022 to 4.4% in the quarter ending in September 2022 due to higher merchandise trade deficit. The CAD of 4.4% of GDP is comparable to 2013 levels when the Indian economy experienced negative trends due to global shocks. The widening CAD reflects the impact of slowing global demand on Indian exports.
In absolute figure, the current account balance recorded a deficit of $36.4 billion in the second quarter of FY23 compared to a deficit of $9.7 billion in the corresponding period of the previous fiscal, according to the Indian Express.
Talking about the emerging situation, the Deloitte report said widening CAD could put further pressure on rupee valuation against the US dollar, which will result in foreign exchange reserves dipping further. Citing Reserve Bank of India (RBI) data, the Deloitte report said that in the April-September period, there was a depletion of $25.8 billion in the foreign exchange reserves on a balance of payment (BoP) basis.
The report also added that although India’s forex reserves dipped from 13 months of import cover at the beginning of 2021 to eight months due to foreign institutional investment outflows, "India is not in a worrisome situation as the country has accumulated sizeable forex reserves over the years (despite having a current account deficit) by importing capital".
However, RBI Financial Stability Report released last week had said steady net inflows of foreign direct investment and the resumption of portfolio flows since July 2022 indicate that the CAD will be comfortably financed.
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