The government?s seemingly optimistic estimate that the current account deficit (CAD) this fiscal would be contained at $70 billion compared with last year?s $87.8 billion assumes a likely steep fall in gold imports and a big increase in ?net invisibles?, potentially aided by a jump in services exports and remittances. These calculations by the finance ministry don?t look very unrealistic according to most analysts, although not everyone is willing to bet on the finance minister?s claim that capital flows would be sufficient to finance even this reduced level of CAD.
According to the finance ministry?s internal estimate reviewed by FE, with the help of the recent clampdown on gold imports and an incipient shift among savers away from physical assets, imports of the yellow metal are expected to be contained at around $38 billion in FY14, sharply down from $53.8 billion in FY13. This, the ministry reckons, would allow overall imports in FY14 to be roughly $6 billion less than last year?s at $496 billion. This is even as the oil import bill this year could be around $170 billion, the same level as last year?s. The government also expects a marginal positive upside on the exports front, hoping to rake in $310 billion this fiscal as against $306.6 billion in FY13.
The addition forecast on the ?net invisibles? account is a good $8 billion, with the figure this fiscal to be estimated at around $116 billion compared with last year?s $107.8 billion. Here, the positive features are the likely jump in services exports, aided predominantly by the software sector, and a surge in remittances. Services exports, which grew an annual 10.2% to $38 billion in the first quarter of the current fiscal is pegged at a neat $70 billion for the full year, as against $64.9 billion in FY13. As far as remittances are concerned, the weak rupee is expected to push the overall figure to $70 billion, up from $64.4 billion last year. Investment income (which includes repatriation by foreign investors) is seen to be negative $24 billion this fiscal, versus minus $21.5 billion last year.
Almost in line with the ministry?s estimates, Crisil on Friday revised its CAD forecast for this fiscal to 3.9% of GDP or $71-72 billion, but said that total foreign capital inflows will be insufficient to cover it.
The ratings agency said that the revised estimate is ?due to the expectation of a sharper slowdown in non-oil import growth, led by a nearly 28-30% cent fall in gold imports. Gold imports, it said, were likely to ease on the back of restriction on investments in gold bars and coins as well as a hike in customs duty on gold imports to 10%. ?We also expect capital and consumption goods imports to continue to moderate due to weak domestic demand,? it added. Crisil, however, noted that foreign capital inflows would likely pick up in the second half of the year when the steps announced by the government to attract $11 billion in additional capital inflows begin to materialise.
India?s merchandise trade deficit for April-July stood at $62.4 billion, 33.5% of the government?s forecast for the full year of $186 billion. Gold imports for the April-July 2013 period have reached $21.3 billion, already 56% of the finance ministry?s estimate for the year.
Sujan Hajra, chief economist at Anand Rathi Securities, said gold imports, already on the decline, could be kept under $40 billion for the year. ?We can also expect fertiliser and coal imports to come down over the course of the year, allowing trade deficit to come in as low at $170 billion if export targets are achieved,? he said, but refused to endorse the remittances figure forecast by the government. ?We expect capital account to only fetch a surplus of only $50 billion, which means the government will have to draw down on the reserves by $20 billion,? Hajra said. According to NR Bhanumurthy of the National Institute of Public Finance and Policy, the finance ministry?s projections pegs the rupee at a certain low level besides factoring in moderate GDP growth. ?The oil import bill will stay close to what it was last year only if growth remains weak. If it picks up, then oil demand will also rise, which may force the government to rethink its numbers,? he said.
