Surging Crude Prices May Negatively Impact Current Account Deficit

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    The Current Account Deficit of the country may worsen due to the rise in the crude oil prices. The current account deficit of India may reach 2.5 percent of the Gross Domestic Product (GDP) of the country during the ongoing financial year.

    Surging Crude Prices May Negatively Impact Current Account Deficit

    The current account deficit stands for the measure of the country's trade wherein the value of goods and services it imports exceeds the value of the goods and services it exports on an annual basis. It also includes net income - interest and dividends, transfers such as foreign aid.

    The CAD narrowed to 0.7 percent of GDP in 2016-17 from 1.1 percent in 2015-16 on the back of the contraction in the trade deficit. India's trade deficit narrowed to $112.4 billion in 2016-17 from $130.1 billion in 2015-16.

    The difference of inflow and outflow of foreign exchange is currently estimated at 1.9 percent for 2017-18.

    As per the report from SBI Ecowrap, which states that every $10 per barrel increase in the price of the oil results in additional import bill of $8 billion. This will, in turn, decrease the GDP by 16bps, increase the fiscal deficit by 8bps, CAD by 27 bps and inflation by 30 bps, the research report further added that these are just model estimates and the actual figures could vary.

    The U.S Presidents decision to pull out of the US-Iran nuclear deal resulted in the escalation of oil prices across the globe. During the last week, the prices of Brent crude oil in the U.S. hit an all-time high of $80 per barrel, which extended its effect on the prices of petrol, diesel across the globe.

    Currently, in India the prices of petrol and diesel are rising on a day-to-day basis, pinching pockets of the common man. The prices of petrol are Rs 76.24 per liter and diesel is Rs 67.82 per liter in New Delhi.

    India depends more than 80 percent on imports to meet its oil needs. The rise in the prices of crude oil has inflated the oil import bill for India.

    The exports during 2017-18, grew at 9.78 percent. April 2018 exports recorded 5.17 percent growth, which shows that the outbound shipments from India are yet to overcome the effects of GST implementation issues.

    The depreciating rupee has added further worry to the current situation. The value of rupee presently stands at Rs 68.14 per as against 1 U.S. dollar.

    The rise in the prices of crude oil by $17 within a span of a year has reflected on the imports showing a growth of 19.59 percent.

    The report further adds that the crude prices are expected to rise further during the year and the imports are likely to grow by at least 14 percent, which will worsen the trade deficit and have a negative impact on rupee value.

    Read more about: crude oil oil prices
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