CAD of 2.5-3% can be sustained without external sector crisis: RBI DG Patra

India's economy is predicted to overtake that of the US by 2048, said Patra

India can tolerate a Current Account Deficit (CAD)of 2.5-3.0 per cent of GDP without experiencing an external sector crisis, Reserve Bank of India Deputy Governor Michael Patra said on Saturday.

“In a telling reminder of this fact, a record increase in oil prices and high gold imports took the current account deficit above this Plimsoll line and to historically high levels during 2011-13,” Patra said at an event in Bhubaneshwar celebrating 75 years of India’s independence.

“When the US Federal Reserve contemplated the end of easy monetary policy in the summer of 2013, India faced the taper tantrum and was labelled as among the fragile five,” he said.

Over the last few months, India has faced upward pressure on its trade deficit sparked by a sharp rise in international commodity prices due to supply-side disruptions following Russia’s invasion of Ukraine.

The domestic trade deficit widened to a record high $31 billion in July. India is the world’s third largest importer of crude oil.

Several economists, including those from Bank of America, expect India’s CAD to rise to around 3 per cent of GDP in the current financial year, sharply higher than 1.2 per cent in the previous fiscal year.

Providing a projection for India’s future growth, Patra said that according to calculations by the Organization for Economic Cooperation and Development, the Indian economy would overtake that of the US by 2048.

“This would make India the largest economy in the world after China,” Patra said, adding that in terms of purchasing power parity, the exchange rate appreciates with the prosperity of a nation and an increase in productivity.

Consequently, the rupee is set to emerge as the second strongest currency in the world following the Indonesian rupiah, Patra said.

In terms of market exchange rates, India’s GDP is expected to reach the $5 trillion mark by 2027 and by that year, the GDP in purchasing power parity terms will surpass $16 trillion, he said.

At present, India is the world’s third largest economy in terms of purchasing power parity, accounting for 7 per cent of global GDP.

Looking at where the country is poised at the moment, there are four engines capable of propelling India towards achieving the status of an economic superpower, Patra said.

These are India’s demographic dividend, momentum in manufacturing, exports and internationalisation.

According to the RBI Deputy Governor, a comparison of the ratio of the domestic working-age population with that of China, Brazil, USA and Japan shows an advantage for India as the working-age populations of the other countries have already started declining.

India’s working-age population ratio will increase till 2045 and the country must make the most of the opportunity, Patra said.

On manufacturing, Patra said that the domestic sector must adapt to the fourth industrial revolution which includes automation, data exchange, cyber-physical systems and the internet of things.

He also emphasised the development of a skilled domestic labour force by enhancing investment in human capital.

With several initiatives, such as the One District One Product plan in place, the aim of increasing India’s share in world exports to at least 5 per cent is within reach, Patra said. At present, India accounts for 2.7 per cent of world exports, with the total exports of goods and services at around $800 billion.

Patra pointed out that Indians were already highly internationalised, with the country being the top recipient of remittances from the diaspora.

“The Indian rupee trades three times more offshore than onshore. If the INR turnover rises to equal the share of non-US non-Euro currencies in global forex turnover (4 per cent), the INR will have arrived as an international currency,” he said.