Rising protectionism may hit India's current a/c deficit next fiscal

A higher oil and gold imports against a doubtful corresponding rise in exports due to increased protectionism by some economies could see India's current account deficit (CAD) creeping up in fiscal 2018 after four years of it continuously narrowing, forecast economists.

A report published by rating firm Icra predicts that next financial year could see CAD widening to 1.2% of the gross domestic product (GDP) or $30 billion from 0.9% of the GDP or $20 billion in the current fiscal.

"Icra expects a rise in the prices and import volumes of crude oil and gold to enlarge the Indian current account deficit to $30 billion in FY18 from $20 billion in FY17,\" said Aditi Nayar, principal economist at Icra Ltd, who has authored the report.

Nayar's outlook for a wider trade deficit, which constitutes a large part of the CAD, is based on the expectation of merchandise imports expanding by 7-8% to $415 billion while the merchandise exports rising by only 5-6% to $290 billion in the next fiscal.

D K Srivastava, chief policy advisor at EY India, feels the pressure on CAD will come more from "continued weakness" in exports than from rising imports due to higher oil prices and gold demand.

"The effect (of higher crude price and gold imports) is going to be marginal on it (CAD). Crude prices in the US have started to fall. I don't think that would put a sustained on pressure on the value of imports to India and the gold import surge was also temporary, partially linked to demonetization. As that gets absorbed, I think the effect on current account deficit is going to be marginal," he said.

Srivastava expects CAD to be between 1% and 1.2% of the GDP in the next fiscal.

Richa Gupta, economist, Deloitte India, believes India's trade balance will depend a lot on how the exports behave.

According to her, any interest rate hike by US's central bank Federal Reserve (Fed) is also likely to push down foreign institutional investors' (FIIs) investments into the country.

"Where our merchandise exports go is uncertain. Last (exports) numbers showed that it had gone into the positive territory, so it has to be seen how exports perform but definitely there are risks on the import side," she said.

India's CAD had moved into a dangerous zone of 4.8% of the GDP in FY13 due to a sharp rise in the import bill and an economic downturn before closing the gap slightly to 2% of the GDP in FY14. It narrowed further in FY15 to 1.8% and then to 1.1% last fiscal. It is expected to shrink further to 0.9% in the current fiscal.

According to yellow metal researcher World Gold Council (WGC), gold demand, which has been brutally hit by demonetization of high-value notes and policy restrictions on imports, is likely to gradually climb up to between 650 and 750 tonne in 2017. It is expected to rise to between 850 tonne and 950 tonne by 2020.

Though, the Icra economist was "unclear" about the pattern of gold demand that could emerge. According to her, it will inch up next fiscal only if "healthy agricultural output boosts rural demand".

Nayar feels it would be net oil imports that be may spoil the CAD story for the government.

"Icra's baseline projection factors in a rise in the average crude oil price to $55 per barrel in FY2018 from $48 per barrel in FY2017, and a 7% uptick in import volumes on the back of sustained domestic demand. Accordingly, net oil imports are expected to expand by 24% to $67 billion in FY2018 from $54 billion in FY2017, emerging as the chief driver of the anticipated widening of the current account deficit," she wrote in her report.

Nayar said resumption of NRI deposits and a healthy FDI inflow in FY18 "would abate the pressure related to the financing of a larger current account deficit in FY2018".

"However, a high likelihood of tightening by the US Federal Reserve in its upcoming meeting, and the possibility of a hawkish outlook for future rate hikes, may limit the extent of FII inflows into emerging markets like India in the coming months," she cautioned.