India’s finance minister P Chidambaram can be forgiven for feeling cheerful. After all, prices for oil and gold, the two biggest constituents of his country’s import bill, have tumbled sharply this week. If sustained, these developments might significantly ease India’s current account deficit headache — possibly to the tune of $20 billion a year.
Chidambaram said yesterday he expects the deficit to halve in a year or two from last year’s 5 percent level. Markets are celebrating too — the Indian rupee, stocks and bonds have all rallied this week.
But are markets getting ahead of themselves? Jahangiz Aziz and Sajjid Chinoy, India analysts at JP Morgan think so.
Chinoy and Aziz acknowledge that India could shave up to $25 billion off its annual import bill if commodity prices do continue falling. They warn however:
Relying on falling global commodity prices – over which policymakers have absolutely no control — to alleviate India’s external imbalances is tantamount to living on a wing and a prayer. Falling commodities will undoubtedly help this year’s current account deficit but cannot be a “plan” or “strategy” for sustained reduction.