NEW DELHI: The widening current account deficit (CAD) amid geopolitical tensions and surging oil prices have become a growing concern for the Narendra Modi-led government. CAD occurs when the value of goods and services imported and other payments made are more than the value of the export of goods and services and other receipts by a country in a particular period. It is an indication that the national savings are lower than the investments.
Experts say CAD will exceed 3% of GDP in the current fiscal due to rising oil prices, restrictions on exports, recession fears in the US, Europe, Japan and Canada, etc. India’s CAD for FY22 expanded to $38.7 billion (1.2% of GDP) as against the surplus of 0.9% in FY21. Though there is scope for CAD to expand up to 3% beyond that, it may get messy for the economy. Higher CAD for an emerging economy like India means debt liability will continue to go up. Elevated debt will raise questions about the country’s capacity to repay its borrowings. The resultant rise in debt will heighten worries about meeting the country’s developmental goals while also servicing the debt obligation.
“The question we need to ask is how much debt India can sustain over a longer term. This depends upon the rate of economic growth. For any country, if the GDP growth is 6% to 6.5% then CAD at 3.5% or more will become unsustainable,” said Pronab Sen, former Chief Statistician of India. Meanwhile, the depreciating rupee is adding to the woes of the Centre by putting pressure on CAD and fiscal deficit besides triggering inflation.
“Currently, we are allowing the rupee to appreciate, although in a controlled way, and that is necessary. But the problem is as the rupee depreciates cost goes up and if there is sufficient pricing power in the market then that cost is also going to pass on, which in turn would make inflation control even more difficult,” Sen added. He further added that the government’s immediate focus should be more on containing inflation and balance of payments (BOP) than economic growth. As per the BOP data, the value of imported goods in FY22 stood at $618.6 billion against $398.5 billion in the year-ago period, leading to a widening of the trade deficit. Dr Charan Singh, CEO of EGROW Foundation and former non-executive Chairman of Punjab & Sind Bank, said the currency should be allowed to find its own natural level. “The value of the rupee is still artificially held. It should be allowed to depreciate. Depreciated currency is good for exports and good for India,” he added.
As per Aditi Nayar, chief economist at ICRA, it will be a challenge for the government to finance CAD if it exceeds 3%. She said if the oil prices persist above $120 per barrel then CAD will surpass the three per cent mark. Nomura in its report stated the high trade deficit will remain a norm for now. It has made a forecast for CAD at 3.3 per cent in the current fiscal.
How to finance the budget deficit
According to Dr Singh, there are various ways to finance government expenditure.
“To illustrate, rising GST collection is encouraging. Expenditure compression is possible. resources can be raised through disinvestment and higher dividends from public sector undertakings. Also, the government can resort to additional market borrowings,” Singh said.
He further added that the government’s National Asset Monetisation pipeline can help too in bridging the deficit.
India’s CAD in the current fiscal year
Experts are of the view that CAD will exceed 3% of GDP in the current fiscal because of rising oil prices, restrictions on exports, recession fears in the US, Europe, Japan and Canada, etc.