If you look at the four major components of the current account, three factors viz. Services Exports, secondary income and interest costs remained flat. The reason for the current account deficit in Dec-20 quarter was a $19.70 billion spurt in the trade deficit on the back of higher oil imports and sustained pressure on exports.
Merchandise Trade deficit widened sharply in Dec-20 quarter
If there was one factor that was responsible for the current account slipping into a deficit in Dec-20 quarter after 3 quarters of surpluses, it was the sharply higher trade deficit. From an average merchandise trade deficit of under $5 billion per month in the Sep-20 quarter, the trade deficit went up to $11.5 billion per month in the Dec-20 quarter. The export growth was constrained by global demand and availability of containers. The imports were higher on the back of revival in capital cycle and higher crude prices. The net impact led to the current account deficit in Dec-20 quarter.
What triggered the current account deficit in Dec-20 quarter
India’s current account has been in deficit for 20 out of the last 25 years. India reported current account deficits between 1995 and 2004. However, between 2004 and 2007 the current account turned into a surplus as there was a major thrust on exports. This was followed by 13 years of current account deficits till 2020 as imports continued to exceed imports by a huge margin. Check the table below.
|Pressure on Current Account (CA)||Amount||Boosting the Current Account (CA)||Amount|
|Q4 Trade Deficit||($34.50 bn)||Q4 Export of Services||+$23.60 bn|
|Primary A/C - Interest||($10.10 bn)||Secondary Income||+$19.30 bn|
|Negative Thrust on CA||(-44.60 bn)||Positive Thrust on CA||+$42.90 bn|
|Current Account Deficit||-$1.70 bn|
In the Dec-20 quarter, it was again about a spurt in the trade deficit as total trade reverted to pre-COVID levels and oil prices rose 3-fold since Apr-20. During the Dec-20 quarter, service export income and the secondary income flows were higher than previous quarter. However, the interest account also saw higher pay-outs as government borrowings went up sharply in FY21. The net impact was a current account deficit of $-1.70 billion Q3-FY21.
Major takeaways from the current account data for Dec-20 quarter
Here is a quick look at some key data points relating to the current account for the Dec-20 quarter and the first nine months of FY21.
- The current account deficit for Q3 of FY21 at $-1.70 billion represents -0.2% of the GDP for the quarter. With a current account surplus of $35.30 billion in the first two quarters and a deficit of just $-1.70 billion in Q3, India can look to comfortably report a current account surplus for FY21.
- The reason the current account slipped from $15.50 billion surplus to $-1.70 billion deficit was the widening of the merchandise trade deficit due to revival in growth impulses post-pandemic and higher crude prices spiking the value of POL imports.
- For the Dec-20 quarter, the services trade surplus improved by $2.5 billion on the back of sustained growth in software exports. Even the flows into India via remittances remained buoyant considering the attractive yields offered by Indian banks.
- On a you basis, the primary account outflows, essentially interest payments, were up 36% at $10.1 billion. This was reflective of a sharp spike in borrowings for the year from Rs700,000cr to Rs12,00,000cr. This will continue in FY22 also.
- For the first nine months of FY21 ending Dec-20, the current account reported a cumulative surplus of 1.7%. This compares favourably with a -1.2% current account deficit in the corresponding period of FY20.
The good news, despite the current account slipping into deficit, is that India may end FY21 with a decent current account surplus. But that was led by short term factors. In the medium term, the trigger could come from the self-sufficiency drive. The Atma Nirbhar scheme has two objectives of reducing substitutable imports and offering a platform for exports.
Apart from oil, India is looking to build self-sufficiency in Pharmaceutical APIs, specialty chemicals, electronics and telecom. That will be import substitution. Secondly, India is looking to become an export hub for automobiles, auto components, mobile phones and refining. The combination could mark a structural shift in the current account towards a long-term surplus. But for that; we may have to wait longer.