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Economic Survey calls for close watch on India’s current account deficit, flags external risks

Strong domestic demand amidst high commodity prices will raise total import bill and contribute to unfavourable developments in the current account balance, warns report.

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New Delhi: India’s current account balance faces risks from external factors that could be exacerbated by “plateauing” export growth, warns the Economic Survey 2023 released  Tuesday.

“While commodity prices have retreated from record highs, they are still above pre-conflict levels. Strong domestic demand amidst high commodity prices will raise India’s total import bill and contribute to unfavourable developments in the current account balance,” stated the survey, tabled by Finance Minister Nirmala Sitharaman in Parliament. “These may be exacerbated by plateauing export growth on account of slackening global demand.”

The Survey warned that India’s current account deficit (CAD) should be “closely monitored” as the growth momentum of the current year spills over into the next.

India’s CAD increased sharply to $36.4 billion (4.4 per cent of the GDP) in the second quarter of FY23 — the highest since 2012 —primarily due to a widening of the merchandise trade gap.

The survey, however, offered an optimistic view of how India has so far mitigated challenges posed by the war in Ukraine without losing growth momentum.

“The Indian economy in FY23 has nearly ‘recouped’ what was lost, ‘renewed’ what had paused, and ‘re-energised’ what had slowed during the pandemic and since the conflict in Europe,” it stated.

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Rupee could come under ‘depreciation pressure’

The Survey also warned that high commodity prices amid the Ukraine war could increase India’s import bill and if exports plateau, the rupee may come under depreciation pressure.  

“Should the CAD widen further, the currency may come under depreciation pressure,” it stated.

It also noted that the growth in exports, which witnessed a surge in FY22 and the first half of FY23 followed by a moderate pace in the second half of FY23, indicates that production processes have gone from “mild acceleration to cruise mode”. 

India’s exports contracted by 12.2 per cent in December 2022 year-on-year from $39.27 billion in December 2021 to $34.48 billion, on account of the global demand slowdown, according to data from the Indian commerce ministry. 

“Entrenched inflation” may mean borrowing costs will stay “higher for longer”, it said. 

In such a scenario, the global economy may be characterised by low growth in FY24, stated the survey.

It, however, offered a caveat. “The scenario of subdued global growth presents two silver linings — oil prices will stay low and India’s CAD will be better than currently projected. The overall external situation will remain manageable,” it stated.

(Edited by Geethalakshmi Ramanathan)

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