Improving the business climate, easing domestic supply bottlenecks, and liberalising trade and investment will be important to help attract foreign direct investment (FDI), boost the current account financing mix, and contain external vulnerabilities, the Fund said.
“The current account deficit is projected to narrow to 0.3 per cent of GDP for India in 2020-21 driven mainly by lower oil prices and import compression due to weak domestic demand with unusually high uncertainty, including over the cyclical position of the economy,” the Fund said.
Gradual liberalisation of portfolio flows should be considered, while monitoring risks of portfolio flow reversals, it said.
However, economists do not agree that there would be current account deficit in FY21. ICRA Principal Economist Aditi Nayar pegged the current account balance at surplus of 0.9 per cent.
“Building in the faster normalisation of exports relative to imports, stabilisation in crude oil prices at a moderate level, expectation of revival in demand for gold closer to the festive season, and the adverse impact of economic uncertainty on remittances, we expect a current account surplus of $22-27 billion in FY21, or around 0.9 per cent of GDP.”
The bulk of this may be concentrated in Q1FY21, at $14-16 billion, given the subdued imports in this quarter. However, as domestic demand revives in the later months, imports may catch up, resulting in relatively smaller current account surpluses in Q2-Q4 of FY21, she said.