Current account deficit likely to grow, pushing up inflation, straining forex reserves – ET Auto

New Delhi: As economists have predicted that India’s current account deficit (CAD) is likely to reach the level of 3 per cent of the GDP in the current financial year and is unlikely to come down in the near future, the government seems to be cautiously optimistic about reining it within tolerable standards.

Experts though feel that it would be a tough task as current account deficit may further go up to more than 3 per cent of the GDP in the current financial year.

Government, on its part, feels that with prices of global commodities like crude oil, fertilisers and gold among others falling, the current account deficit will gradually cool down.

Official sources say that the aforementioned commodities consume a significant part of foreign exchange and as their prices are showing a downward trend, its positive impact on current account deficit will reflect in the near future.

Experts, however, differ completely from this estimation, as Sher Mehta, economist and Director of Research at Virtuoso Economics, feels that current account deficit is likely to worsen in the coming days.

“In my estimation, the current account deficit will probably worsen to 3.4-3.5 per cent of GDP and is likely to reverse only from the second half of 2023. Given the prospects of a rapidly weakening global economic environment, exports are likely to fare worse over the coming 9-12 months and most of the worsening of the current account deficit

will be due to a widening trade deficit,” he said.

The country’s monthly trade deficit for goods has been rising and in July, it had gone past $31 billion. As imports continue to rise and exports hitting a plateau, the current account deficit is expected to rise, said an industry and trade watcher.

Government on its part, is cautious about rising current account deficit, as could be seen from Finance Minister Nirmala Sitharaman’s reply to a question in Parliament during the recently-concluded Monsoon session.

Asked whether the current account deficit will grow due to rising crude oil prices, she said that the government is carefully monitoring it.

At the same time though she said that current account deficit depends on various factors like exports and imports as well as on crude prices.

However experts on their part feel that it is highly unlikely that it can be reversed in the immediate future.

Only if exports rise, will current account deficit come down to tolerable limits, said an independent economist requesting anonymity.

However due to global recessionary trends and the government imposing ban on export of food items like wheat and rice, growth in exports seems difficult as of now, he added.

On the other hand, India’s forex reserves have slid drastically to $560 billion from a peak of $640 billion till almost a year back. This has basically happened due to rupee depreciation, the economist said.

Therefore as the country imports costly items and commodities like crude oil, medicines, semiconductors and electronic goods, the burden on the exchequer is rising and this is pushing the current account deficit higher.

So, under the current scenario, the current account deficit is likely to balloon and as a result of this, inflation will rise and forex reserves will deplete, say experts.

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