India's current account deficit widens to $23 billion in Dec-21 quarter

1 Apr 2022 , 11:27 AM

There was little surprise in the widening of the current account deficit. With the merchandise trade deficit widening sharply and the services surplus failing to keep pace, the spike in current account deficit was axiomatic. From a current account surplus of $6.6 billion in Jun-21, it turned into a current account deficit of ($9.6) billion in Sep-21 and deepened further to a CAD of ($23.0) billion in Dec-21 quarter. In last 12 quarters, current account position has flattered only when imports were curbed due to supply chain constraints; as in the case of the pandemic.

At the peak of the pandemic, amidst relative import constraints; India had reported record levels of current account surplus. The current account surplus stood at $19.79 billion and $15.51 billion in Jun-20 and Sep-20 quarters respectively. The recent deterioration of the current account situation is largely on account of worsening trade deficit situation. Current account deficit as a percentage of GDP widened to 2.7% in the Dec-21 quarter. However, the CAD for Apr-Dec 2021 at 1.2% is lower than the CAD at 1.7% for Apr-Dec 2020.

Chart Source: RBI

Why did the current account deficit widen in Dec-21 quarter?

For the Dec-21 quarter, the current account deficit slipped deeper to $23 billion compared to current account deficit of $9.6 billion in Sep-21 and a surplus of $6.6 billion in Jun-21 quarter. There were 3 key reasons for the current account deficit widening in the Dec-21 quarter.

a) Firstly, the merchandise trade deficit widened sharply from $-34.6 billion in the Dec-20 quarter to $-60.4 billion in the Dec-21 quarter. Apart from a surge in oil and gold imports, supply chain constraints caused a spike in other imports too.

b) For the Dec-21 quarter, the services surplus improved yoy from $23.2 billion to $27.8 billion. However, this paled in comparison to the merchandise trade deficit, which almost doubled resulting in the current account deficit widening.

c) Primary outflows on account of payments on investments in the form of interest and dividends increased, albeit marginally, on a sequential basis.

Merchandise trade remains the key factor. In the last few months, not only have oil imports remained elevated, even gold imports were driven higher by persistent demand from jewellers and stockists. In addition, most other inputs also saw a surge in imports amidst stocking demand as well as a spike in the cost of inputs.

Components of the Current Account Deficit for Dec-21 quarter

It may be recollected that India had reported current account surplus in FY21, due to the $35 billion surplus generated in Jun-20 and Sep-20 quarters. COVID 2.0 did help India revert to a current account surplus in the Jun-21 quarter. As imports picked up steam in Sep-21 and again in Dec-21 quarter, exports were flat to lower. This worsened the current account deficit.

Pressure on Current Account (CA)	Amount	Boosting the Current Account (CA)	Amount
Q3 Trade Deficit	($60.40 bn)	Q3 Export of Services	+$27.80 bn
Primary A/C – Interest	($11.70 bn)	Secondary Income	+$21.30 bn
Negative Thrust on CA	(-72.10 bn)	Positive Thrust on CA	+$49.10 bn
		Current Account Deficit	(-$23.00 bn)

Data Source: RBI

The dip in the current account from a surplus of $6.6 billion in Jun-21 quarter to a deficit of $9.6 billion in Sep-21 and further to $23 billion the Dec-21 quarter was an outcome of weak trade data. The merchandise deficit surged from $30.70 billion in Jun-21 quarter to $44.40 billion in Sep-21 quarter and further to $60.40 billion in the Dec-21 quarter. For the full year FY22, the total exports have crossed $400 billion while total imports have crossed $600 billion. In short, the overall trade has crossed above $1 trillion in FY22, but the downside is that the trade deficit has also gone above $200 billion. That is the area of concern.

However, there have been other pressure points too. The primary account consisting of net interest outflows has risen sharply from $7.60 billion in Jun-21 quarter to $9.70 billion in Sep-21 quarter and further to $11.70 billion in the Dec-21 quarter. That contributed to the pressure on the current account resulting in the widening of the current account deficit. Even the services trade, despite reporting a surplus, could not compensate for the higher merchandise trade beyond a point.

Will merchandise trade pressure CAD in Mar-22 quarter?

One of the most significant influencers of the CAD is the combined deficit of merchandise and services trade. We have captured the data till Feb-22, i.e. 2 months after the reported Dec-21 quarter CAD. The sharply higher merchandise trade deficit, widened the combined deficit by $14.30 billion from $(-39.91) billion in Jan-22 to $(-54.21) billion in Feb-22.

Particulars	Exports FY22 ($ bn)	Imports FY22 ($ bn)	Surplus / Deficit ($ bn)
Merchandise trade	$374.81 bn	$550.56 bn	$(-175.75) bn
Services Trade #	$226.96 bn	$132.45 bn	$+94.51 bn
Overall Trade	$601.77 bn	$693.01 bn	$(-81.24) bn

Data Source: DGFT (# – DGFT estimates due to 1-month lag in RBI reporting)

The combined deficit (merchandise + services) in first 11 months of FY22 is already 6.34 times the deficit figure for FY21. It could widen further by Mar-22. Based on trade indicators, the current account deficit could sharply widen in the Mar-22 quarter.

Major takeaways from the current account data for Dec-21 quarter

Here are some 4 key takeaways from the current account data for Dec-21 quarter.

• The trade deficit for the Dec-21 quarter was twice as high on a yoy basis. With COVID pressures easing and Ukraine causing higher crude prices, things could get tougher.
• Exports are not able to keep pace with imports due to practical constraints like order flows, infrastructure bottlenecks and availability of containers.
• The primary outflows had tapered in the Jun-21 quarter but that has reversed with a sharp rise in Sep-21 quarter and further spike in Dec-21 quarter, pushing up GDP.
• With GDP growth being driven by trade, as evinced by the Dec-21 quarter GDP data, it is clear that the trade deficit will continue to put pressure on the current account position.

Purely based on the trade data, it looks like Mar-22 quarter could see trade deficit widening sharply and thus impacting the overall current account deficit. Current account deficit has already moved up from 0.3% of GDP in Jun-21 quarter to 1.3% in Sep-21 quarter to 2.7% in the Dec-21 quarter. This could just widen to beyond 3% in the Mar-22 quarter.