Softening of global commodity prices may put a leash on inflation, but their elevated levels also need to decline quickly to reduce India's current account deficit.
Nirmala Sitharaman. Pic/AFP
India's current account deficit, meaning a shortfall between the imports and exports, is expected to deteriorate in 2022-23 if recession concerns do not lead to a sustained and meaningful reduction in the prices of food and energy commodities, the Ministry of Finance said in its latest Monthly Economic Review report.
Softening of global commodity prices may put a leash on inflation, but their elevated levels also need to decline quickly to reduce India's current account deficit. A sudden and sharp surge in gold imports amid wedding season, as many weddings were postponed to 2022 from 2021 due to pandemic-induced restrictions, is also now exerting pressure on the trade deficit, it said.
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The country's trade deficit widened to USD 45.18 billion in April-June 2022 period as compared to USD 5.61 billion recorded in the corresponding period of last year. In order to alleviate the impact, the government recently hiked the customs duty on gold from present 10.75 per cent to 15.0 per cent. "The deterioration of current account deficit could, however, moderate with an increase in service exports in which India is more globally competitive as compared to merchandise exports," it said.
The widening of current account deficit has depreciated the Indian rupee against the US dollar by 6 per cent since January of 2022, and is on the brink of touching 80 mark. "The depreciation (in rupee), in addition to elevated global commodity prices, has also made price-inelastic imports costlier, thereby making it further difficult to reduce the CAD," it said.
A depreciation in rupee typically makes imported items costlier. India's forex reserves, in the six months since January 2022, have declined by USD 34 billion. However, the momentum in the Indian economy is holding up better than expected, despite commodity price shocks in the last four months, the report added. "After a sluggish start, the seasonal rainfall has picked up and it is geographically well dispersed. That is good news too."
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