Saturday, September 23, 2017

India's current account deficit unlikely to come down, may reach $40 billion in fiscal 2017-18: Well-known economist

N Our Representative
One of India's topmost economists, Prof Prabhat Patnaik, has predicted that the total current account deficit for the financial year 2017-18 is likely to be anywhere between $30 to $40 billion, as compared to just $15 billion for 2016-17. In an incisive analysis of the state of the country's finances, he says that it is highly unlikely that the recent jump in the current account deficit to $14.3 billion, or 2.4% of the quarterly GDP (April-June) from 0.1% a year ago, will come down.
Insisting that it is not a "temporary aberration", as the Government of India is trying to make out, Patnaik says, "In fact, the first quarter (April-June in fiscal 2017-18) current account deficit is almost equal in absolute value terms to the deficit for the entire financial year 2016-17, which was $15 billion."
Agreeing that this enormous jump in the current account deficit did not pose any "immediate problem with regard to its financing", the economist says, this is because "there was a jump in the inflow of Foreign Direct Investment and, even more pronouncedly, of Foreign Portfolio Investment, because of which not only was this deficit easily financed, but India even added $ 11.4 billion to its foreign exchange reserves in this quarter, taking the total of such reserves to over $ 400 billion."
However, be that as it may, Patnaik predicts, the recent "widening deficit" portends a bleak future for the country's finances. This, he says, began with "a rise in gold imports in anticipation of the shift to a Goods and Services Tax (GST) regime which was to occur on July 1; and a drag on exports arising from the uncertainties associated with this shift to GST."
This "implicitly underscored the culpability of the BJP government", Patnaik says, adding, facts suggest that the widening of the deficit is unlikely to be a "passing phenomenon". Thus, "the upsurge in gold imports has not abated in the subsequent period after the introduction of the GST."
The result, according to the top economist, is that "the merchandize trade deficit -- which, at a whopping $41.2 billion in the April-June quarter, and was the main reason for the widening of the current account deficit -- continues to remain wide even in the current quarter; and continuing large-scale gold imports are certainly contributing to it."
"The merchandise deficit for the month of August for instance is estimated to be $11.6 billion; at this rate the merchandise deficit for the second quarter too would amount to about $35 billion", says Patnaik, adding, the problem is likely to be aggraved because of "the gradual pick-up in world oil prices."
Pointing towards yet another factor which may affect India's finances adversely, the economist says, it is the news that the US Federal Reserve is expected to raise interest rates. "Once this happens, which may be quite soon, India will find it difficult to finance its current account deficit" as it would "stimulate a flight of capital from India," he underscores.

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