ICRA expects the current account deficit to widen to USD 47-50 billion in FY2018 and further to USD 55-60 billion in FY2019 from the modest USD 15 billion in FY2017. The recent increase in tariffs by the US may trigger similar action by other countries, which has emerged as a risk for the volumes of global trade. The pace of exports of gems and jewellery would take a cue from demand, as well as the availability of funding for this sector in the aftermath of the fraud reported by PNB; however, lower exports would in turn dampen imports of gold and pearls, precious and semi-precious stones. At present, ICRA expects the current account deficit to print at 1.9-2.0% of GDP in both FY2018 and FY2019.
Aditi Nayar, Principal Economist, ICRA, said, ''With rising commodity prices contributing to a relatively higher growth of India’s merchandise imports relative to exports, ICRA expects the current account deficit to widen to USD 17-18 billion in Q3 FY2018 from USD 7.9 billion in Q3 FY2017 and USD 7.2 billion in Q2 FY2018. This, in conjunction with the sharp increase in the merchandise trade deficit to USD 16.3 billion in January 2018 from an average of USD 12.8 billion in 9M FY2018, suggests that the current account deficit may increase sharply to USD 47-50 billion (~1.9-2.0% of GDP) in FY2018 from USD 15 billion in FY2017.''
''A pick-up in global economic growth may boost Indian exports to some extent in the coming fiscal. However, the increase in tariffs by the US may trigger similar action by other countries, hurting the volume of overall trade. The pace of exports of gems and jewellery would take a cue from demand, as well as the availability of funding for this sector in the aftermath of the fraud reported by PNB; however, lower exports would in turn dampen imports of gold and pearls, precious and semi-precious stones. Moreover, the trend in prices of crude oil, coal, gold and other commodities would affect the level of growth of exports and imports in FY2019,'' Nayar added.
Factoring in an average crude oil price of USD 65.0/barrel in FY2019 (~USD 56/barrel in FY2017) and a 6.0% rise in net import volumes, net oil imports are likely to rise to ~USD 85 billion in FY2019 from ~USD 69 billion in FY2018. ICRA estimates that every USD 1 increase in the price of the Indian crude oil basket, would bloat annual net oil imports and the current account deficit by USD 1.3 billion in FY2019.
The YoY rise in gold imports in FY2018 has partly been on account of rebuilding of inventories after the sharp dip in gold imports in FY2017 and also a result of the improvement in demand after the record-high harvest. The volume of gold imports, as well as imports of pearls, precious and semi-precious stones, may dip in FY2019, particularly if exports of gems and jewellery are muted. On balance, ICRA's baseline expectation is that the value of gold import is likely to remain stagnant at around USD 31-32 billion in FY2019, if the gold price averages to USD 1,350/ounce.
Electronic goods accounted for around 14% of the rise in merchandise imports in April-January FY2018, which is likely to be on account of the competitiveness engendered to such imports following the appreciation in the INR relative to some other Asian currencies. The pace of growth of such imports may be dampened following the increase in customs duties on some items in the Union Budget for FY2019. Nevertheless, growth would take a cue from domestic consumption demand, as well as the exchange rate movement going forward.
ICRA expects merchandise exports and imports to expand by 9-10% each in FY2019, widening the merchandise trade deficit to ~USD 167-172 billion, unless commodity prices recede significantly. However, the services trade surplus and remittances are likely to improve modestly in the coming fiscal. Overall, we expect the current account deficit to increase further to USD 55-60 billion in FY2019 in absolute terms, while continuing to print around ~1.9-2.0% of GDP.
