CAD likely to hit over 3 yrs high at $43.8 bln in FY22. How does FY23 look like
4 min read 09 Jun 2022, 08:35 PM ISTGoing forward, Ind-Ra said, geopolitical risks and the slowdown in China due to the stringent lockdown across various major cities owing to a surge in COVID-19 cases have accentuated the supply-chain disruption further, just when the global recovery was taking an incipient shape.
PremiumIndia's current account deficit (CAD) is expected to hit more than a 3-years high for the financial year FY22, as per India Ratings. Notably, CAD in fiscal FY23 will be impacted due to headwinds clouding merchandise exports while higher commodity prices and weakening of the rupee to accelerate imports. Geopolitical tensions, Covid shocks in China, and inflationary pressure is seen to disrupt the supply chain further.
Ind-Ra expects the country's CAD to have moderated to $17.3 billion (1.96% of GDP) in the fourth quarter of FY22, as against a deficit of $23.02 billion (2.74% of GDP) in 3QFY22 and $8.2 billion (1.03% of GDP) in Q4FY21 which was at a 13-quarter high.
In FY22, Ind-Ra estimates CAD to have been at $43.81 billion (1.38% of GDP) compared to the current account surplus of $23.91 billion (0.9% of GDP) in the previous fiscal.
Data from the Commerce & Industry ministry showed that India recorded all-time high annual merchandise exports of $417.81 billion in FY22 - increasing by 43.18% compared to $291.81 billion in FY21. Notably, India for the first time crossed $40 billion in monthly merchandise exports - reaching $40.38 billion in March 2022 up by 14.53% year-on-year.
Meanwhile, the merchandise import was at $ 610.22 billion in FY22 - an increase of 54.71% over $394.44 billion in the previous fiscal.
Thereby, India's trade deficit stood at $192.41 billion in FY22 increasing 87.49% from $102.63 billion in FY21.
As per Ind-Ra, key commodities such as petroleum products, iron & steel, aluminum & its products, pearl, precious and semi-precious stones, sugar, motor vehicles, and cotton yarn contributed roughly 72.2% to the merchandise exports growth and grew in the range of 14%-158% yoy in value terms in 4QFY22. However, volumes of these commodities grew in the range of negative 76% to positive 64% yoy in the same period. The major part of the merchandise export growth was primarily driven by prices as has been the trend in the previous few quarters. Nevertheless, the volume growth in 4QFY22 over 4QFY20 was in the range of 18%-73%, alluding to strong demand for these items (barring pearls and other precious stones) from the rest of the world.
Going forward, Ind-Ra said, geopolitical risks and the slowdown in China due to the stringent lockdown across various major cities owing to a surge in COVID-19 cases have accentuated the supply-chain disruption further, just when the global recovery was taking an incipient shape.
In Ind-Ra's opinion, so far, the beginning of FY23 has been encouraging as merchandise exports in April-May 2022 grew 22.9% yoy. However, there have been strong headwinds – expected stagflation in the developed world and continued supply chain disruptions that could taper off the high double-digit growth witnessed since March 2021.
India has recorded a 22.26% growth in merchandise exports to $77.08 billion in the first two months of FY23 (April - May 2022) compared to $63.05 billion in the same period last year. Merchandise imports stood at $120.81 billion in April - May 2022 - increasing by 42.35% from $84.87 billion in the corresponding period of the previous year. The trade deficit during these two months is at $43.73 more than doubled from $21.82 billion in April - May 2021.
Ind-Ra expects the merchandise exports to come in at $112.5 billion, growing by 17.7% yoy in 1QFY23 (1QFY22: up 85.7% yoy). The merchandise imports grew 44.1% yoy during April-May 2022 to $120.9 billion and are expected to stand at $182.9 billion increasing by 44.1% yoy in 1QFY23 (1QFY22: 107.2%).
Ind-Ra said that this is due to the normalisation of domestic economic activities, steep levels of commodity prices (volatile crude oil prices, Brent crude averaged $113.11/barrel in May 2022; April 2022: $104.89/barrel, March 2022: $117.25/barrel) and inflated freight and transportation costs. Moreover, the Indian rupee is expected to depreciate to ₹77.1 against the US dollar in 1QFY23, higher by 4.5% over 1QFY22.
Notably, the World Trade Organisation (WTO) has forecasted merchandise trade volume growth at 3% in 2022, down from its earlier forecast of 4.7%. The stellar performance of India’s merchandise exports in FY23 (FY22: 42.4%, FY21: negative 7.5%) would face significant headwinds by the clouds of uncertainty and volatility in the global economy.
WTO has pegged the imports volume growth for India’s key exporting partners such as the US (North America) and Europe at 3.9% and 3.7%, respectively, in 2022, lower than 4.5% and 6.8%, respectively, forecasted earlier. However, higher oil prices will benefit oil-exporting countries such as the UAE, which will lead to higher real incomes, and thus, higher import demand.
Further, according to WTO, the Middle East’s import demand is expected to increase by 11.7% yoy in 2022 from 8.7% yoy forecasted earlier. On the other hand, India’s merchandise imports are expected to accelerate on the back of escalated commodity prices and higher rupee depreciation in FY23.
