The current account deficit may touch 4.2 per cent of gross domestic product (GDP) in this fiscal as well, as upside risks to the external environment are rising for the economy, brokerage firm Nomura said today.
The brokerage had earlier forecast a tempered 3.8 per cent current account deficit (CAD), the difference between country's total imports & transfers and total exports & outward transfers, for this fiscal, following steady fall in inward and outward shipments and the resultant narrowing of trade deficit in the first half of the fiscal.
In the past fiscal too CAD had hit a record of 4.2 per cent of GDP.
"With external situation remaining very worrying, we see more upside risks to our CAD projection of 3.8 per cent with the current trends suggesting that it could be as high as 4.2 per cent of GDP, which was recorded last fiscal," Nomura India economists Sonal Varma and Aman Mohunta said in a note.
However, they blamed the latest spike in imports due to the import substitution, saying, "the phenomenon of rising imports and lower domestic output can be explained by increasing import substitution as a result of supply-side constraints and elevated inflation."
The trade deficit widened to an all-time high of $21 billion in October from $18.1 billion in September due
to weak exports, which declined for the sixth month in row to minus 1.6 per cent y-o-y in October and and rising imports which rose 7.4 per cent in the month.
What is worrying is the stronger imports which rose 7.4 per cent against 5.1 per cent a year ago, they said,
adding "this is not consistent with an economy that is slowing sharply."
The trade deficit worsened by an average of $3.8 billion between September and October during the last three
years. However, the trend in imports ex-gold is also clearly higher, they warned.
Explaining the rising upside risks to higher CAD, they said the problem is that the rise in non-oil imports is not consistent with a slowing economy, as the IIP data suggest. Also, the higher trade deficit reflects weak exports, driven by a seasonal rise in gold demand and also a genuine improvement in imports due to import substitution.
"The ongoing rebound in import suggests that supply-side constraints and the high cost of domestic production may be leading to greater import substitution, dragging on domestic industrial production and worsening the trade deficit, The rise in imports is not consistent with a slowing economy," they said.
The government and the Reserve Bank as also economists are of the view that the country can sustain a 3 per cent CAD comfortably with the current level of capital inflows.