India's macroeconomic fundamentals have seen considerable improvementin the recent years. Prominent among these is the current account, a measureof external vulnerability.
After spiking to 4.8% of GDP in fiscal 2013, current account deficit (CAD) fell to1.1% in 2016. We expect it to decline further to around 0.9% of GDP in fiscal 2017 before rising to 1.3% of GDP in fiscal 2018.
On the road ahead, India's current account position is dependent on two risks– rising global protectionism, and higher commodity prices. While globaldemand has started to recover, the popular mood in advanced economies isturning against international trade. Advanced economies occupy the highestshare in India's exports. Moreover, their share has increased further in therecent years. Should the protectionist policies be adopted in these advancedeconomies, India's exports can get severely affected. Along withmerchandise exports, services exports can also take a hit. India's services exports have already been suffering in the recent years due to weak global growth.
On the other side, prices of commodities, whose fall was a crucial factor behind the decline in CAD, are expected to rise in fiscal 2018. This will putpressure on import bill, especially through rising value of oil imports, which constitute ~23% of India's imports. Since commodities have a greater sharein India's imports than in exports, rising commodity prices, ceteris paribus, will widen CAD.