Current account may turn surplus in FY21 : 22-05-2020

India’s current account could show a surplus this year for the first time in several years, economists said, following a sharp decline in domestic demand for investment and consumption goods. The slump in crude and commodity prices and lower demand for them are also contributing to the decline in imports. The surplus is expected to be $19-20 billion in FY21, or around 0.7% of GDP.

The last time India had a current account surplus was in FY07.

The current account deficit has traditionally been regarded as a weakness but experts see a bigger problem in a surplus as it stems from demand destruction due to the economic slump caused by the Covid-19 pandemic and the lockdown.

SBI group chief economic adviser Soumya Kanti Ghosh expects a decline of 20% in FY21 in non-oil, non-gold imports. These are generally regarded as a measure of domestic demand and strength of the economy. The 52.18% decline in such imports in April also signals a sharp fall in investment activity, given that India typically imports a substantial amount of capital and project goods.

‘Indicative of slowdown’
“We maintain hat India will witness a current account surplus in FY21 and a large BoP (balance of payments) surplus too,” said Ghosh.

HDFC Bank chief economist Abheek Barua estimates the current account surplus at 0.3-0.7% of GDP this year. “It is cause for concern, in the sense it helps by default, but the factors that underlie the switch from persistent negative to positive is not just fall in oil prices,” he said. “It shows fundamental we ..weakness of the economy that is responsible for it…This is indicative of slowdown in the economy.”

Barclays chief India economist Rahul Bajoria expects a $20 billion current account surplus. That’s “an unwelcome development because the surplus will be driven almost entirely by the lockdown of the economy to contain the Covid-19 outbreak, and helped by the plunge in oil prices,” he said.

It’s a sharp swing from the last fiscal, when the deficit in the first nine months was $120 billion

“We don’t expect a current account surplus but if it does happen, it means that not only has the economy collapsed but so has policy-making because it shows the government is unable to revive the economy,” said NR Bhanumurthy, professor at the National Institute of Public Finance and Policy. “In such a case, immediate policy measures would be needed to prop up the economy.”

The current account is defined as the difference between the value of exports of goods and services and the value of imports of goods and services. It’s also expressed as the difference between national savings and investment — a deficit implies the country is using foreign saving for growth.

Seen in this way, for a capital-scarce and developing country, a current account deficit can help faster output growth and economic development. A current account surplus, therefore, indicates a deep growth shock. “We expect current account to be marginally in surplus in FY21 given that crude oil is about $25 lower than the average of last year along with weak domestic demand,” said Kotak Mahindra economist Upasna Bhardwaj.

Independent experts expect India’s economy to contract by as much as 7% in FY21.

India unveiled a Rs 20 lakh crore relief package last week that includes liquidity measures taken by the Reserve Bank of India (RBI) to counter the economic impact of the Covid-19 outbreak that has hit the economy hard. Some economists have said that it lacked immediate steps to spur demand.

“With demand for gold expected to shrink appreciably given the high prices and ongoing economic uncertainty, India’s current account balance may record a small surplus in the ongoing year,” said Aditi Nayar, principal economist, ICRA.

Source : Financial Express

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