Current a/c deficit may hit all-time high of 3.2%

NEW DELHI: Ballooning oil import bill and a decline in capital flows are pushing current account deficit to an all-time high of 3.2% of GDP during 2008-09. The estimated deficit for the year is $41.5 billion, according to the Prime Minister���s Economic Advisory Council. In Q1 and Q2 of 2008-09, deficit could be over 4.5% of GDP, declining in the last two quarters.

The estimated 3.2% current account deficit for the fiscal is more than double the deficit of 1.5% in 2007-08. The only year when it crossed 3% was 1990-91 ��� when it touched 3.1%, leading to a crisis due to dwindling foreign exchange reserves. The silver lining now is that forex reserves stand at over $300 billion ��� far above the comfort level.

According to the EAC report, trade deficit is likely to widen to 10.4% of GDP in 2008-09 compared to 7.7% in 2007-08. Merchandise imports would grow to $332 billion, with the oil import bill growing due to high crude prices. Exports would grow to $205 billion, leaving a deficit of $127 billion. The council expects export growth at $22.5% while import growth would be higher.

Capital flows would decline to $71 billion in 2008-09, far lower than the previous year���s $108 billion. Despite the decline, the net addition to forex reserves would be $30 billion.

The panel���s assessment is that volatility cannot be ruled out during the remaining part of the year, and the government can relax ECB norms since other capital flows would slow down. ���Policy makers may, however, need to be prepared to face a situation of greater volatility in capital inflows on account of uncertain external environment,��� the EAC report says.

The reasons for the dismal situation include the spiral in crude prices which pulled down the stock market, resulting in significant outflow of portfolio investments. The trade deficit also ballooned due to high oil import bill, and the situation was compounded by fluctuations in the rupee-dollar exchange rate.


Increasing inflation and high interest rates have added to the complex problem and the only solace is softening of crude prices in recent weeks.