The central government is carefully monitoring the current account deficit (CAD) levels, finance minister Nirmala Sitharaman informed the parliament, as the key macroeconomic indicator remains under stress on account of high crude oil prices and elevated gold imports.
Sitharaman’s comment came in response to a question on whether India’s current account deficit will grow with the skyrocketing crude oil prices, which have been hovering around $100 per barrel since the beginning of Russian military invasion into Ukraine. This has impacted India’s finances as the country imports a substantial portion of its fuel requirements.
In a written reply to the Lok Sabha, Sitharaman notes that the government has increased customs duty on gold to 15% from 10.75% to discourage imports of the precious metal to bridge the country’s current account deficit. As many weddings were postponed to 2022 from 2021 due to pandemic restrictions, gold demand saw a huge spurt in the current wedding season, leading to a rise in gold imports and putting pressure on the current account deficit.
The finance minister also told the house that the Reserve Bank of India (RBI) has recently announced a series of measures to boost foreign exchange inflows to finance the current account deficit. The central bank recently allowed exemption from cash reserve ratio (CRR) and statutory liquidity ratio (SLR) on incremental foreign currency non-resident (bank) (FCNR (B)) and non-resident (external) rupee (NRE) term deposits, lifted interest rate cap on these deposits, eased norms for FPI in debt market, and increased the external commercial borrowings limit under the automatic route.
These measures are expected to augment the influx of foreign exchange, which have declined by $34 billion in the six months since January 2022 in a bid to finance the widening CAD and rising FPI inflows.
“The size of India’s current account deficit (CAD) depends on several factors including exports, imports, price of crude oil, among others. Government is carefully monitoring the CAD and has recently increased customs duty on gold from 10.75% to 15% to restrain gold imports that is likely to reduce CAD. Further, RBI has recently announced a series of measures to increase foreign exchange inflows to finance current account deficit,” Sitharaman mentions in her reply.
In its monthly economic review for June, the finance ministry had maintained that India will be able to bridge its CAD only if global commodity prices decline quickly. While recession fears across major economies has softened global commodity prices, absence of a sustained and meaningful reduction on food and energy commodities will cause CAD to widen in fiscal 2023 on account of costlier imports and tepid exports on the merchandise account.
The ministry, however, expects the projected deterioration in CAD “to moderate with an increase in service exports in which India is more globally competitive as compared to merchandise exports”.
The central government also expects the recent revenue generation measures to help control the rise in the current account deficit, as well as ensure that fiscal slippage, if any, is well contained.
For another part of the same question, referring to impact of crude oil prices on the nation’s budget, Sitharaman clarifies that the estimates of expenditure do not take into account any particular price level of the crude oil.
“The Budget Estimates of Expenditure for FY 2022-23 do not presume any particular price level of crude oil. The Budget does not provide subsidy for petroleum products except LPG,” the finance minister states. “Economic Survey for 2021-22 assumes crude oil prices to be in the range of $70 to $75 per barrel while projecting the GDP growth rate during the financial year 2022-23 to be 8% to 8.5% in real terms.”