Widening trade deficit: Prospects are for a doubling of current account deficit in FY23 - Financial Daily News Site

Widening trade deficit: Prospects are for a doubling of current account deficit in FY23

India’s trade deficit widened to record levels in April-May this fiscal—thanks to skyrocketing oil and commodity prices triggered by the war in Ukraine—which will pressure the current account. This is the broadest measure of India’s goods and services transactions with the rest of the world. Although India’s exports rose by 25%, imports surged even higher, by 45%, when compared to April-May FY22. The deficit thus more than doubled to $45 billion, although it is much less at $27 billion if both goods and services are taken into account. Even the latter marks a five-fold increase from a year earlier.

The burgeoning deficit stems from costlier oil prices—the average crude basket was up by two-thirds to $106.24 per barrel from a year before—with serious consequences for the country that imports 85% of its requirements. A rule of thumb is that every increase in global oil prices by $10 a barrel raises the current account deficit by $9-10 billion. The deficit is expected to double in FY23 to 3.1% of GDP according to Fitch Ratings, financing of which could be worrisome if net inflows of foreign direct investments and portfolio investments are not at expected levels. But India has ample forex reserves.

The most efficacious policy response to deal with widening trade imbalances is to maintain an open and unrestrictive trade policy, as has been underscored by former chief economic advisor Shankar Acharya in his influential writings. That is a challenge in today’s environment when protectionism is in the ascendant, and countries are tempted to resort to bans on exports to shore up domestic availability and cool down inflation. There has also been a significant hike in India’s imports tariffs since FY15, which impacts trade expansion.

The noteworthy strides the country made toward a more liberal trade regime since the early 1990s was reflected in a steady rise in the share of good and services trade in GDP that peaked at 55.7% in FY13. Since then, and especially since FY15, this has declined, reaching a low of 40% in FY20. The pandemic led to substantial declines in both exports and imports, followed by a sharp rebound in FY22 when the share of trade in GDP rose to 44%. Sustaining this uptrend should be a policy priority and entails phasing out the tariffs increases since FY15, among other measures.

On the export front, India has pushed ambitious targets; there is also a higher level of ambition in inking deep free trade agreements in contrast to the earlier ambivalence regarding their benefits. A comprehensive economic partnership agreement with the UAE and an economic cooperation and trade agreement with Australia have been recently signed. Several other deals are currently under negotiation. India has also recently decided to join the US-led Indo-Pacific Economic Framework, along with 12 other countries, marking its return to that region after exiting from the Sino-centric Regional Comprehensive Economic Partnership. All of this is to be welcomed as it opens up the prospect of India participating in global supply chains. But it calls for tariff reform as India’s duties are much higher than its current and prospective FTA partners. While India should be mindful of past experience, negotiations entail a process of give and take, all of which is facilitated by a more open and unrestrictive trade policy. That is indeed the way forward.

Tags: #Widening #trade #deficit #Prospects #doubling #current #account #deficit #FY23

Leave a Comment