CAD remains high, but within manageable levels

The widening of the CAD has been driven by a deterioration in the trade deficit from 6.0 per cent of GDP in 2017-18 to 6.7 per cent in 2018-19, mainly due a rise in crude oil prices in 2018-19. 

However, the Survey says acceleration in the growth of remittances has helped prevent a larger deterioration of CAD. 

In funding the CAD, the total liabilities-to-GDP ratio, inclusive of both debt and non-debt components, has declined from 43 per cent in 2015 to about 38 per cent at end of 2018. Further the share of foreign direct investment has risen and that of net portfolio investment fallen in total liabilities, thereby reflecting a transition to more stable sources of funding CAD. In sum, although CAD to GDP ratio has increased in 2018-19, the external indebtedness continues to be on a declining path.

The Survey notes that India’s foreign exchange reserves continue to be comfortably placed in excess of $400 billion. The rupee traded in the range of 65-68 per dollar in 2017-18 but depreciated to 70-74 in 2018-19. The exchange rate in 2018-19 has been more volatile than in the previous year, mainly due to volatility in crude prices, but not much due to net portfolio flows. The Real Effective Exchange Rate also depreciated in 2018-19, making India’s exports potentially more competitive. The income terms of trade, a metric that measures the purchasing power to import, has been on a rising trend, possibly because the growth of crude prices has still not exceeded the growth of India’s export prices.

India’s external debt stood at $521.1 billion at end-December 2018, 1.6 per cent billion lower than its level at end-March 2018. Long-term debt declined by 2.4 per cent to $417.3 billion at end-December 2018 over end-March 2018, though its share was mostly same at 80.1 per cent of total external debt compared to 80.7 per cent during the same period. 

The composition of India’s exports and import basket has by and large remained unchanged in 2018-19 over 2017-18. India’s merchandise exports stood at $330.07 billion in the year 2018-19. Petroleum products, precious stones, drug formulations, gold and other precious metals continue to be top export items. 

India’s imports, on the other hand, stood higher at $514.03 billion during the year 2018-19 with crude oil, pearl, precious, semi-precious stones and gold being top import items. India’s merchandise trade deficit stood at $183.96 billion during the period.  India’s main trading partners continue to be the US, China, Hong Kong, the UAE and Saudi Arabia.

India ratified the WTO Agreement on Trade Facilitation (TFA) in April 2016 and subsequently constituted a National Committee on Trade Facilitation (NCTF) which has played an important role in reducing the high cost of imports and exports so as to integrate our cross-border trade with the global value chain. These efforts have resulted in substantive improvement of India’s performance in ‘Trading Across Borders’ indicator as well as in ‘Ease of Doing Business’ ranking. The logistics industry of India has also seen significant development which has led to a jump in India’s global ranking in the World Bank's 2016 Logistics Performance Index.

The government has announced a draft National Logistics Policy, for which a national logistics action plan is being developed. The key objective is to drive economic growth and trade competitiveness of the country through a truly integrated, seamless, efficient, reliable and cost effective network through various logistics schemes.

The World Economic Outlook (WEO) April 2019 has forecast acceleration of world output in the second half of 2019. The key assumptions in this regard are continued accommodative monetary policy stance in advanced countries and fiscal stimulus in China and de-escalation of trade tensions between the US and China.  While there could be pressure on crude oil prices to increase as global economic activity picks up, it may not impact India due to its favourable impact on India’s exports. 

Government expects policy changes further lifting restrictions on FDI inflows will continue to increase the stability of sources funding the current account deficit.  From a macro-economic perspective the deterioration of CAD may be contained if consumption slows down in the economy while increase in investment and exports become the new drivers of the Indian economy, the Survey notes.