With a significant drop in domestic economic activity due to the coronavirus-induced lockdown significantly reduced imports, the finance ministry expects the country's current account balance to turn into a surplus in the first quarter of fiscal 2020-21 after a 12-year difference.
Last time current account deficit of India turned positive was in the March 2006-07, at $ 4.2 billion. However, for the year as a whole, the current account was positive for three consecutive years from 2001-02 to 2003-04.
India's CAD fell to 0.2% of GDP in the December quarter of fiscal 2014, from 0.9% in the September quarter due to the decline in trade deficits and the rise net service revenues. Data for the March quarter are expected to be released later this month.
Fortunately, India's external sector has grown in resilience, manifesting itself in an improvement in the Balance of Payments (BOP) position, although it has been challenged by net REIT outflows for some time.
A comfortable BoP is based on a manageable current account deficit (CAD), prudent external debt and a high availability of adequate foreign exchange reserves to finance more than eleven months of imports, “the finance minister said in his latest report.
Macroeconomic in May, the considerable drop in domestic economic activity considerably reduces imports, the current account balance of India could generate a slight surplus in the first quarter of 2020 to 21. The CAD of India is also supported by lower external debt service levels, the report said.
SBI Research and Barclays forecast a current account surplus of $ 19 billion or 0.7% of GDP in fiscal 21. Called “an unwanted surplus”, Barclays said last month that it was an unpleasant development, because the surplus will be drawn almost entirely by the closure of the economy to contain the pandemic epidemic, helped by the fall in oil prices and not by excessive exports in relation to imports.
While countries have sealed their borders to stop the spread of the coronavirus and supply chains have broken down due to mobility restrictions, merchandise exports from India in the first two months of the fiscal year prices (April-May) contracted 47.5%, while imports fell 54.7%, resulting in a trade deficit of $ 9.9 billion against a deficit of $ 30.7 billion in the same period a year ago.
Despite massive stock market sales amid fears surrounding covid-19, India's foreign exchange reserves continued to grow and peaked for life at $ 507.6 billion during the week for The 12 June, helped by a significant jump in foreign currency assets.
“The sharp drop in crude oil prices and weak domestic demand for gold imports may have canceled out the impact of the REIT's leak on reserves,”said the finance ministry.
- A current account deficit occurs when a country spends more on its imports than what it receives for its exports.
- A trade deficit means there is more being bought than there is being sold by a country.
- If a current account deficit remains on the books for a long time, it can mean future generations will be burdened with high debt levels and large interest payments.
- Deficits aren't necessarily a bad thing. Current account deficits may signal an increase in the future production of exports, while trade deficits may signal investment in innovation and/or R&D.