India’s Current Account Deficit breached the 2 per cent (of Gross Domestic Product) psychological mark in the April-June quarter of 2018. How worried should we be of such rising CAD? And how judicious are the government’s proposed measures to curb such CAD?
Of Heroes and Villains
The typical villains in India’s CAD story have been imports of gold and crude oil. With international crude prices rising due to production cuts by the Organisation of the Petroleum Exporting Countries (OPEC), the oil bill has been rising.
What about ‘non-essential’ gold and the government’s decision to restrict gold imports? India had been importing lesser gold year on year since 2015. In 2017, however, the introduction of the Goods & Service Tax (GST) led to an inadvertent error, which scrapped the Countervailing Duty of 12.5 per cent on gold imports from countries with which India had Free Trade Agreements (FTAs), especially South Korea. Between July 1, 2017 and August 3, 2017, gold imports from South Korea thus jumped to USD 338.6 million. Contrast this with the value of gold imports in 2016-17 from South Korea, which stood at USD 70.46 million. The government finally restricted gold imports from South Korea on August 25, 2017. The gold imports in 2017-18 thus were higher than in the previous years. Currently, while gold imports are substantial, accounting for 53 per cent (USD8444 million) of our CAD in April-June 2018, such gold imports have actually fallen from 75 per cent (USD 11266 million) of our CAD in April-June 2017.
The increase in imports in 2017-18 has been also on account of higher non-oil, non-gold imports — coal, machinery and capital goods — which actually point to a reviving economy. The heroes of India’s CAD story are India’s service exports, which have bridged much of the CAD. However, a careful perusal of our service exports indicates that India’s service exports are not sufficiently diversified. Software service exports account for more than 41 per cent of the total service exports, while sectors such as business services, as also personal, cultural and recreational services have run into a deficit. Further, more than 90 per cent of the IT service exports cater to only three markets: United States of America, United Kingdom and European Union. Clearly, the basket of service exports, as also destinations will need to be expanded to neutralise the risks associated with shrinking external demand.
The Current Account Deficit is not just the difference between goods and services a country imports and exports. Paradoxically, the foreign direct investments (FDI) and foreign portfolio investment (FPI) flows we attract, as also the loans that we borrow to bridge the CAD, also contribute to it. This is because the interest and dividends on such foreign inflows are also part of the CAD. Such interest and dividends on FDI, portfolio flows, and other investments received from foreigners has accounted for 43 per cent of the current account deficit in April-June 2018.
