What Does India's Narrowing CAD Indicate?

Fri, 23 Sep 09:30 am

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In 2013, current account deficit (CAD) became a chief headache for India. The rise in imports, falling exports and decline in the rupee all weighed on the matter. Sensing the urgency, former RBI Governor Raghuram Rajan, along with the government, implemented a host of measures to bring the CAD under control. The measures worked and the CAD did come under control. And fast forward to today, we are in a much better situation on the CAD front.

But are we doing good enough? Which factors led to shorten the gap in CAD? And what are the consequences? Let us delve into some details to answer these questions.

Current account deficit is seen when the value of the goods, services, etc. a country imports exceeds the value of the goods and services it exports. Hence, CAD for India represents that the value of India's imports is greater than its value of exports to other countries.

Data released by the Reserve Bank of India (RBI) this week showed India's CAD narrowed in the first quarter of FY17 on a YoY basis. As per the data, India's CAD during the first quarter of FY17 stood at US$ 300 million. This was against US$ 6.1 billion seen during the first quarter of FY16.

On percentage basis, the CAD shrank to 0.1% of gross domestic product (GDP) during the above period. Three years back, this figure stood at an unprecedented 4.1% of GDP.

The obvious conclusion to this is India is in a much better position deficit wise as compared to three years back.

However, it is imperative to note that the current account deficit has not narrowed due to increase in exports. Rather, the deficit has gone down due to a significant decrease in the country's imports. This just goes on to signify the weak investment demand conditions in the economy. During the quarter ended June, merchandise imports declined by 11.5%.

Apart from the above, there are several other indicators too that show a bleak picture of India's economy. One is the decline in foreign direct investments (FDI) inflow. FDI inflow stood at US$ 4 billion for the quarter ended June. This was against US$ 10 billion a year ago.

Not only this, remittances from abroad - India's strongest source of dollar inflows - stood weak. Flows from personal transfers, money that Indians abroad remit back home dropped to US$ 13.8 billion in the June quarter from US$ 15.7 billion a year ago.

So the conclusion from above data points is that while the CAD in India has improved, many factors still need to catch up. For that to happen, the government needs to improve the business environment in the country. That will facilitate foreign capital inflows. Also, it needs to make exports more competitive. Going forward, increase in FDI inflows coupled with remittances and a surge in exports will play as key variables to keep the current account deficit in check.

Apart from above, there remain many concerns for the Indian economy at the macro level. In order to stay on top of big macro trends in India, we recommend you to read some of the recent articles in The Vivek Kaul Letter (subscription required. Vivek Kaul addresses a range of big issues - such as the government's handling of oil prices, the mess in public sector banks, the current state of India's real estate bubble...and a lot more!

In fact, as you read this, Vivek has just come out with a video that details all...including how these macro trends could impact you.

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