India’s Current Account Deficit
Based on data for the first half of 2008/09, India’s current account looks to be heading for a fiscal year deficit of more than 3% of GDP. This would match
the highest ever shortfall since the data began in 1950/51.
During India’s Balance of Payments crisis, the peak full year deficit was 3% of GDP in 1990/91. The recent deterioration reflects the previous period of above-trend growth as well as the earlier oil price surge. The good news is that the external deficit is now significantly better covered by foreign exchange reserves. In 2008/09 we expect FX reserves to be equivalent to 10-11 months of imports, while in 1990/91 it averaged 1.9 months with an low of just three weeks.
India’s other deficit, the government budget, is likely to prove a bigger problem. In 08/09, we expect the central government deficit to hit 6.3% of GDP, with the state deficit at 3.5% of GDP, giving an overall figure of 9.8%. Such high deficits are threatening India’s sovereign credit rating, which is only one notch above non-investment grade, and it will be left to the next government to bring the deficit to sustainable levels. In so doing, the 9% of GDP infrastructure spending objective is likely to be missed by a wide margin.
Lastly, GDP surprised hugely on the downside in fiscal Q3, with year-on-year growth slowing to 5.3% (the weakest since Jan-March 2003.