Know Your Facts: Indian current account deficit and possible consequences


The Indian current account deficit is moving up steadily over the years, causing an alarm among the economic pundits about where our currency heading in value against the dollar. For example May 31, 2011, 1 US $ fetched 45.06 Rs and on April 12, 2013 it is trading around 54.50 Rupees. It reached a high of 68.15 Rs on Aug 29, 2013 and through intervention it is currently brought down to Rs. 62.

The current account deficit for the financial year 2010 – 11 was $ 130 billion dollars and this increased to $ 185 billion dollars for the financial year 2011-2012. For the first 11 months of the financial year 2012 – 2013, we have already crossed $ 180 billion dollars and well end the financial year with a deficit of 195 – 200 billion dollars. Clearly this is not sustainable.

Such large current account deficit will sooner or later will impact the value of currency against the US dollar. A local bank is quoting 67 Rs to a dollar for a four year forward contract. This is of course is purely based upon expected inflation rate differential between India and the US.

For the data available for the financial year 2011 – 2012, we can see clearly where the deficit is coming from. The data is presented below:

Break up of India’s import numbers for FY 2011 – 2012

Commodity

Value in US $

% share of impact

Petroleum and oil 155.6 billion 32%
Gold & Silver 61.5 billion 13%
Coal 17.6 billion 4%
Machinery 35.4 billion 7%
Electronic goods 32.7 billion 7%
Iron & Steel 11.9 billion 2%
Vegetable oil 9.7 billion 2%
Fertilizer 11.0 billion 2%
Precious Stones 31.0 billion 6%
Others 122.2 billion 25%

We need to bring this down substantially. Our exports for FY 2011 – 12 were $ 303.7 billion. So this gap of $ 185 billion dollars must be shrunk.

In the short-term especially when the election is around within a year, it is very unlikely our government will take any bold steps.

In fact, our current account deficit looks very similar to Argentinean crisis of 2001-2003. Their Peso which was on par with the US dollar (namely 1 Peso = 1 US dollar) is currently trading around 5 Peso to the dollar. Therefore India should take this situation seriously before a major crisis develops in the currency market.

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