Rising oil prices to widen trade deficit

MUMBAI: The turnaround in India’s current account in the fourth quarter of ‘06 (Q4’06) is unlikely to last in the coming quarters, with global crude oil prices touching a new high this week.

The share of crude oil in the country’s total merchandise imports has been going up steadily since prices started rising steeply from August ‘04 onwards. From 26.7% in FY04, it shot to 30.87% in FY06. The uptrend in global crude over the last two years has affected the strength of the country’s external sector.

The current account records the receipts and payments on account of purchase and sales of goods (trade account) and services (invisibles) and other current receipts. This showed a surplus for nearly two years, but slipped into a deficit since ‘03-04. From a surplus of $10bn in FY04, the current account went into a deficit of $10.6bn in FY06.

However, the latest balance of payments released in June’06 has shown the current account back in the black for the quarter ended March’06, as the surge in merchandise imports, including oil import bill, was more than offset by the growth in inflows from software services and remittances.

The Q1’06-07, i.e., quarter ended June 30, ‘06 too is likely to show a relatively lower oil import bill since oil price did not rise significantly between April and June. Besides, according to the latest trade figures, the country’s exports have grown at a much faster pace than the country’s imports, thus helping to bring down the trade deficit.

The impact of the recent surge in crude price, with the price per barrel rising by over $5 in a matter of just four to five days, will be felt in the balance of payments figures for Q2’06-07 (i.e, quarter ended September). As the volumes of imports are steady at round 22-24 tonne a quarter, according to oil industry analysts, the deficit is likely to widen.

Significantly, for an oil dependent-economy like India, a higher crude price inevitably cast a shadow on the stock markets. First, there are fears that inflation and higher interest rates could affect the earnings of local corporates.

Secondly, fears of a higher current account deficit put pressure on the local currency, which prompts the foreign portfolio funds to step up their selling.

This has been happening over the past few days. With the Centre not intervening in the forex market (i.e, selling dollar to prop up the rupee), FIIs fear that they could lose out on the exchange rate.