In July, the trade deficit widened to a record $30 billion due to a 70% increase in crude oil imports
In July, the trade deficit widened to a record $30 billion due to a 70% increase in crude oil imports
Reserve Bank of India (RBI) Deputy Governor Michael D. Patra said on Saturday that India’s economy can face a current account deficit (CAD) of 2.5-3.0% without facing an external sector crisis.
“Our experience has been that India can maintain a current account deficit of 2.5-3.0% without falling into external sector distress,” Mr Patra said in a speech on Saturday.
The trade deficit has widened in 2022 given the rise in international crude oil prices, raising concerns. In July, the trade deficit widened to a record $30 billion due to a 70% increase in crude oil imports.
Elaborating on the importance of current account deficit, Mr Patra said: “The current account deficit (CAD) in the country’s balance of payments (BoP) determines how much foreign savings or net capital inflows can be absorbed into the country.” or used for development. Exports earn foreign exchange while imports have to be paid in foreign currency.”
He said that given India’s dependence on foreign purchases of commodities that the country does not produce such as crude oil and commodities such as machinery, equipment and technology, imports generally exceed exports and hence foreign exchange earnings cover import payments. was not enough to do. “The gap will have to be filled by borrowing from abroad, however, to be served by way of principal and interest payments,” he said, “if the debt service exceeds our earnings, we will either have to reduce imports and Our growth prospects will have to be stifled or we face loan defaults and international isolation.”
Explaining how a record rise in oil prices and high gold imports had pushed the current account deficit above the “plimsol line”. [of 2.5-3% of GDP levels] and at historically high levels during 2011-13″ Mr Patra said, adding that the US Federal Reserve’s idea of ending easing monetary policy in the summer of 2013 and the resultant ‘taper tantrum’ labeled India as a part of The fragile five’ economies include Brazil, India, Indonesia, South Africa and Turkey.
Mapping India’s growth over the decades, he said that an important feature of the economy was that development was financed from home. “Investment is financed primarily by domestic savings, with foreign savings playing only a complementary role.”
“Another noteworthy feature is that the savings rate has started slowing down from 2007-08 after the global financial crisis. Eventually, it pulled down the investment rate, which has exhibited a slowdown since 2012-13. To achieve higher growth it is important to reverse this trend,” he emphasized.