Current account deficit narrows to 1.5% of GDP in March quarter
Moderation in trade deficit and a lower net outgo of primary income behind contraction
PremiumMUMBAI : India’s current account deficit CAD) narrowed to 1.5% of gross domestic product (GDP) in the three months through March, down from 2.6% in the December quarter, primarily because of a moderation in trade deficit and lower net outgo of primary income.
The CAD decreased to $13.4 billion in Q4 of FY22 against a deficit of $22.2 billion in the previous quarter, Reserve Bank of India (RBI) data released on Wednesday showed. For FY22, the current account balance recorded a deficit of 1.2% of GDP, against a surplus of 0.9% in 2020-21, as the trade deficit widened to $189.5 billion, from $102.2 billion a year ago.
Private transfer receipts in the March quarter, mainly representing remittances by Indians employed overseas, increased to $23.7 billion, up 13.4% from the same period last year. In the financial account, net foreign direct investment (FDI) was $13.8 billion and was higher than $2.7 billion in Q4 of 2020-21, while net foreign portfolio investment (FPI) recorded an outflow of $15.2 billion, mainly from the equity market.
“The CAD printed well below our forecast of $16 billion in Q4 FY22, benefiting from higher-than-expected secondary income," said Aditi Nayar, chief economist, Icra.
On a year-on-year (y-o-y) basis, though gold imports halved and the services trade surplus rose, this improvement, Nayar said, was dwarfed by the widening of merchandise trade deficit, led by imports of commodity inputs such as crude oil, coal, and fertilisers, as well as electronic goods.
According to RBI, net external commercial borrowings (ECBs) to India were lower at $3.3 billion in Q4 2021-22, as compared to $6.1 billion a year ago. That apart, there was a drawdown of $16 billion in the foreign exchange reserves, on a balance of payments basis, against an accretion of $3.4 billion in Q4 FY21.
Rahul Bajoria, managing director and chief India economist at Barclays expects the deficit to widen materially in the coming quarters, given the ongoing improvement in growth and the surge in commodity prices, especially for energy.
“Since September 2021, India’s trade deficit has trended higher, with the May value reaching a record high. With global commodity prices staying elevated, we expect trade deficit to widen to $265 billion in FY23. Our deficit projection assumes an average oil price of $110/bbl, with risks of a wider deficit should oil prices climb higher," Bajoria said in a note on Wednesday.
Bajoria sees risks skewed towards a larger deficit and said if it starts to approach 4% of GDP, policymakers would need to take steps, both fiscal and monetary, to reduce the pressure on the current account.
“While FDI flows are likely to stay broadly stable, record portfolio outflows, especially in equities, and rising dollar funding costs should keep capital flows negative, at least in the near term. This means foreign reserves are likely to fall further, to about $565 billion by March 2023, in our view," he said.
Other experts have also been predicting a higher current account deficit in the current financial year. A report by Acuite Ratings said on 17 June that the combination of elevated global commodity prices, sequential improvement in domestic growth, and gradually increasing vaccination coverage is resulting in widening of trade and current account deficit for India.
“We expect India’s CAD to widen to more than $90 billion in FY23, from an estimated level of $47 billion in FY22 amid persistent rise in crude oil price which has again risen to more than $120 per barrel," Acuite said.
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