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Economy

Fiscal deficit may negate the benefits of current account surplus

It was a week during which two major macroeconomic announcements by the government dominated the headlines. On 30 September, the current account balance for the Jun-20 quarter and the fiscal deficit for the first five months of this fiscal were announced. Here are some interesting takeaways from the two important macro announcements

5 mins read   |   03-Oct-2020   |  
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Written By: Bani Thakkar

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Biggest current account surplus

For the Jun-20 quarter, Indian economy reported its highest current account surplus in history at $19.8 billion. For a long time, India had grown to believe that the current account was almost synonymous with a deficit. In the Mar-20 quarter, India reported a modest current surplus of $584 million for the first time in 13 years. But the surplus of $19.8 billion in the Jun-20 quarter was beyond the wildest imagination. There were some important triggers. Current account is a combination of the trade position and other revenue flows including remittances, profits, interest, dividends and fee payments. The first factor was that trade deficit for the Jun-20 quarter compressed to just $10 bn. If you added up the $20 billion services surplus you actually had a net surplus of $10 billion in the Jun-20 quarter. Also, the inward revenues from investments abroad remained robust. The net result was a record current account surplus. This is likely to be positive for the Indian rupee and also for sovereign ratings. 

Fiscal deficit the concern

If the current account surplus showed that India was finally earning more from international transactions than it was spending, there was concern on the fiscal deficit front. Fiscal deficit is that part of the budget gap that has to be bridged with borrowings. The fiscal deficit for the Apr-Aug period touched 109% of full year target. Rating firms like ICRA and CARE have estimated that fiscal deficit for FY21 could end up at 7.5% as against the budgetary target of 3.5%. Against, the full year fiscal deficit target of Rs.792,000 crore, India has already breached Rs.870,000 crore with 7 months of the fiscal year left. Clearly, the portents are ominous and India may have to go on a borrowing spree. 

Pump priming has its limits

India cannot breach CFD targets like other nations as its resources are limited and per capita income levels are much lower. A spike in fiscal deficit means higher bond yields, higher borrowing costs and crowding out of private players from the debt market. All these could have negative repercussions on GDP recovery. Earlier this year, the GOI had enhanced its full-year borrowing target from Rs.7.80 trillion to Rs.12 trillion. That has not been tampered with; which means we will need a huge push to disinvestments, including LIC and BPCL. CFD cannot be allowed to negate gains on the current account!