Unmanageable current account deficit is a cause for concern

Unmanageable current account deficit (CAD) should be cause for worry for Arun Jaitley and interim finance minister Piyush Goyal ahead of the last full budget to be presented even as prime minister Narendra Modi prepares to seek a second term in office. There is no point in finding reasons to justify the runaway CAD that is likely to touch $70 billion and constitutes 2.4 per cent of GDP in the current fiscal. This will be over $20 billion more than $48.7 billion reported a year before. Deterioration in CAD over the last four years would be a sticking point in the management of central finances. Given the grim scenario, top guns in the government stopped talking about wiping out the entire CAD that was just 0.4 per cent in 2014. The twin issues of high inflation and higher interest rates have been extensively analysed. Now, the third macro-parameter that stares in the face is balance of payments (BoP) and CAD getting out of hand.

Finance Ministry data released on Wednesday does not provide any solace given that in the fourth quarter of 2017-18 alone, CAD ballooned to $13 billion as against $2.8 billion in same period in the previous year. This is more than the CAD reported for entire fiscal 2016-17.

This year again, the numbers may not look any better. Expanding the trade deficit is easily the biggest factor though firming up of commodity prices have also contributed substantially. Commerce minister Suresh Prabhu may have to explain the massive 42 per cent growth in trade deficit at $160 billion during 2017-18 vis-à-vis $112.4 billion in the year-ago period. RBI data on the trade front indicates that surpluses built in due to services exports, in fact, saved the day for the Modi government. Otherwise, trade deficit would have only worsened.

Fixing merchandise trade conundrum should be a priority for the centre. India seems to have had very limited success in exploiting new markets, retaining its share in traditional geographies and attempting fresh strategies. Trade wars between major powers and currency volatility have only worsened the situation for India. Moderation in net foreign direct investments (FDI) at $30.3 billion in 2017-18 as against $35.6 billion in the previous year is yet again a factor to be flagged. However, three times growth in foreign portfolio investments at $22.1 billion as against $7.6 billion in the previous year seems to have been largely made up lower net FDI.

Crude prices have played out in bringing about an element of uncertainty to external finances. If the Indian crude basket price averages $75 as estimated vis-a-vis $56 per barrel last fiscal, then the oil import bill would touch $100 billion in 2018-19 as against $71.1 billion in the previous year. An 8 per cent growth in oil imports may also have to be factored in.

It is in this context that India’s offer to tango with China to form an oil buyers’ club assumes significance. With China joining hands with India, two major oil consumers in Asia will improve the pricing terms from the 14-member Organization of Petroleum Exporting Countries (OPEC) that currently dominates the crude market. It will also help the US counter the OPEC’s dominance.

Minister of Petroleum and Natural Gas Dharmendra Pradhan seems to have only dusted up a decade-old proposal of then petroleum minister Mani Shanker Aiyer while seeking to form an alliance of oil consumers globally. Modi-Jaitley-Goyal will have to devise a reworked strategy to manage CAD. Overcoming differences with the US on duties relating to steel exports could be the starting point. Improving merchandise exports contribution to the government’s kitty needs to be explored further. RBI may have to step in if the swing in rupee value does not stop quickly. The personal rapport with Chinese President Xi Jinping may have to be leveraged by Modi to quickly form the oil buyers club. Apart from that, cutting down on non-essential non-oil and oil imports cannot be avoided.