Rising current account deficit and widening trade deficits point to a lower growth rate while uncertain global macro-economic environment poses another threat

During the first quarter of FY2012-13, India’s current account deficit (CAD) rose to 3.9% of GDP against 3.8% same period of the last fiscal. For FY2011-12, the record high trade deficit last fiscal had pushed up the CAD to 4.2% of GDP. The current account deficits indicate serious macroeconomic imbalances that could put the Indian economy at risk.

Finance Minister P Chidambaram, speaking at the 26th Meeting of the International Monetary and Financial Committee, said that India’s current account deficit has remained elevated during the last few quarters due to widening of trade deficit reflecting worsening global situation. And due to the uncertain global macro-economic environment and slowing domestic growth, the financing of the current account deficit will continue to remain a challenge, he said.

Nomura Securities expect the current account deficit to reach record high in the third quarter. It estimates that the current account deficit would worsen to an all time high of around 4.9% of GDP citing the sharp deterioration in the trade deficit as the main reason.

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S&P projects the current account deficit for the financial year to be 3.5% of GDP, below last year's 4.5%, given the inflow of foreign direct investment, and portfolio investments. However, S&P said it has cut its FY13 growth forecast for India to 5.5%, from 7% previously, due to soft domestic and external demand.

The International Monetary Fund (IMF) on Monday slashed India’s growth forecast for calendar year 2012 to 4.9% from 6.2% in July. The IMF has cited "continued investment slowdown" and further deterioration in the global economy as the main drivers behind the downgrade. In its July outlook, the IMF had estimated India’s 2013 GDP growth at 6.6%. The IMF expects India to end the year with a current account deficit of 3.8% of GDP which again, is out of line when compared with other Asian economies.

The World Bank too, recently cut India’s growth forecast for the current financial year to 6% from the earlier estimate of 6.9%, citing corruption and uncertainty in policy issues.

According to monthly customs data, the trade deficit widened to 12.2% of GDP in Q3 from 9.7% in Q2. While oil prices have risen, most of this worsening is in the non-oil segment. The oil trade balance has remained broadly unchanged (at -6.1% of GDP in Q3), while the non-oil trade balance has worsened to -6.1% of GDP from -3.3% in Q2.

According to the commerce department, exports contracted for the fifth straight month in September to 10.8% to $23.7 billion from a year ago. Imports rose by 5.09% to $41.8 billion on a 31% rise in oil imports to $14.1 billion. The trade deficit swelled to an 11-month high $18.1 billion from $15.7 billion in August.

Non-oil imports for the month showed a contraction of 4.5%, indicating that the economy was still struggling but rising crude consumption was worsening the trade deficit. The high trade deficit last fiscal had pushed up the current account deficit to 4.2% of GDP.

Exports have dipped sharply this fiscal due to shrinking demand from the West, a major market for Indian goods, and other markets such as Japan and Korea. The sectors affected the most include engineering goods, petroleum products, gems and jewellery, drugs and pharmaceuticals, and readymade garments.

In a recent press release, M Rafeeque Ahmed, president, Federation of Indian Export Organisations (FIEO) citied contraction in global demand and deceleration in manufacturing as the primary concerns for the slowdown. He stated that given the existing macro-economic scenario, India (as per IMF Fiscal Monitor) has the highest levels of fiscal deficits in the world, at 9.5% of gross domestic product (GDP). Only Japan has performed worse than India and even Europe (Spain, Ireland and Greece) has shown better public finances. Mr Ahmed stated India’s expected growth rate for the Indian economy in 2012 is lower than the Asian average, and far lower than the average (6.7%) for developing Asia. The high fiscal and current account deficits indicate serious macroeconomic imbalances that could put the Indian economy at risk.