BoP likely to drop, time to rein in CAD

India's balance of payments (BoP) is likely to slip into a $40-50 billion deficit in the current fiscal. The reason is the widening goods trade imbalance that may not get bridged by the invisibles' surplus - largely software exports and inward remittances - and capital inflows that are expected to be muted this fiscal. India has forex reserves of about $530 billion to manage the deficit. But a drawdown in the reserves ($642.45 billion as on September 3, 2021) is likely to put pressure on the rupee. India's forex reserves have been built by capital inflows, unlike China and Japan where they have been built from trade surpluses. They are unabsorbed capital inflows and, as such, are liabilities that their foreign owners can take out of the country. But a buffer offers stability, and proof that India will not be in a position where it can't pay for its imports or service its debt, whether on the government account or otherwise. Foreign investors invest here due to this reassurance.

The current account deficit (CAD), an indicator of the BoP position, widened to 2.8% at $23.9 billion in the June quarter of this fiscal mainly due to a higher trade deficit. A Barclays Research report cautions that the slowdown in the global economy is likely to increase risks of a wider CAD and a stickier fiscal deficit profile. India has the potential to grow. But for the world to deploy its savings here, macroeconomic conditions must be stable.

GoI must give a renewed push on reforms to attract more foreign direct investment. FII inflows tend to be fickle. But resilient services income offers a stable source of forex inflow. Raising exports (and export competitiveness) in manufacturing and services will make imports sustainable and rein in CAD.