Current Account Deficit falls to just 0.2% of GDP in Q4FY23

28 Jun 2023 , 10:13 AM

The RBI reports the CAD data with a lag of 3 months. The March 2023 quarter CAD along with the CAD for the full year FY23 was published on 27th June 2023. The next CAD publication of the Q1FY24 quarter will happen on the last working day of September 2023. In a sense, the Q4FY23 CAD restores the sanity after the CAD had sharply slipped in the previous quarters. The table below captures the current account balance for the last 12 sequential quarters.

Quarter	Current Account Balance
Quarter Ended June 2020	$19.79 billion
Quarter Ended September 2020	$15.51 billion
Quarter Ended December 2020	$(2.2) billion
Quarter Ended March 2021	$(8.1) billion
Quarter Ended June 2021	$6.58 billion
Quarter Ended September 2021	$(9.71) billion
Quarter Ended December 2021	$(22.16) billion
Quarter Ended March 2022	$(13.40) billion
Quarter Ended June 2022	$(18.20) billion
Quarter Ended September 2022	$(30.90) billion
Quarter Ended December 2022	$(18.20) billion
Quarter Ended Marcy 2023	$(1.30) billion

Data Source: RBI

The indications were already there of narrowing of the current account deficit with the merchandise trade deficit gradually tapering and the service trade surplus gaining heft. There have been two positives for the current account balance in the March 2023 quarter. The current account deficit is now at its most attractive level since it last reported a surplus on the current account in the June 2021 quarter. Secondly, if you look at the FY23 data for the period ended in March 2023, the current account deficit for the full fiscal year was 2% of GDP. This is relatively higher than the CAD reported at 1.2% of GDP in FY22. However, at the halfway mark of FY23, it did appear like the CAD may trend towards 3.5% to 4% of GDP for the full year. Compared to those intimidating expectations, 2% of GDP sounds like a breeze.

What has improved the current account situation so drastically in the March 2023 quarter? Two factors favoured the current account situation in March 2023 quarter. Merchandise trade deficit tapered amidst falling commodity prices and slowing imports. The global slowdown in demand has hit exports but it has also reduced the imports so it is largely compensated. The bigger gains were visible on the services trade front, led by IT and related consultancy services. The services exports gathered momentum to the extent that overall deficit of goods and services was almost neutral in certain months. That has been a game changer for the current account deficit in India. A wider current account deficit has negative implications for the rupee value and the sovereign ratings outlook. Hence, the narrowing of the CAD comes as a blessing in disguise for Indian economy.

What narrowed the current account deficit sharply in Q4FY23

For the March 2023 quarter, the current account deficit narrowed sequentially from $18.2 billion to a mere $1.3 billion. Remember that the current account deficit had touched an all-time high of $30.9 billion in September 2022 quarter, so in the last 5 months it has been a truly sharp fall. In percentage terms, the CAD for Q4FY23, at 0.2% of GDP looks a lot more benign compared to CAD of 2.2% of GDP for Q3FY23 and an extremely intimidating CAD of 4.4% of GDP in Q2FY23 quarter. Of course, March 2023 marks the seventh consecutive quarter of reporting a current account deficit (CAD), but the extent of the CAD is a lot less disconcerting compared to what it was in the last two quarters. Now for the granular look at how the CAD fell so sharply in March 2023 quarter.

1. Firstly, the merchandise trade deficit narrowed sequentially from $(83.5) billion in the September 2022 quarter to $(72.7) billion in the December 2022 quarter and further to (52.6) billion in the March 2023 quarter. This was largely on account of lower commodity prices and weak import numbers. 

    

2. What is more interesting is that the POL (petroleum, oil, lubricants) accounted for 51% of the overall merchandise trade deficit for March 2023 quarter. This was just 45% for December 2022 quarter and 40% in the September 2022 quarter. Effectively, there has been a sharp fall in the non-oil imports in the quarter including fertilizers, coal, ores, gold, silver, alloys, and chemicals; which can be attributed to the localization strategy.

    

3. The big story in March 2023 (Q4FY23) quarter was the growth in services surplus to $39.1 billion, the highest level in the last 4 sequential quarters. The service surplus had stood at $31.1 billion in Q1FY23, $34.4 billion in Q2FY23 and $38.7 billion in Q3FY23. The services surplus has grown incrementally in the last few months to largely offset the negative impact of the merchandise trade deficit.

    

4. Primary outflows on account of payments on investments in the form of interest and dividends widened sharply narrowed marginally from $12.7 billion in Q3FY23 to $12.6 billion in Q4FY23. This is on account of larger pay-outs on in-bound investments.

Overall, the trends from the CAD story appear to be positive for the March 2023 quarter. The current account deficit for the last quarter of FY23 has narrowed sharply to just 0.2% of GDP. The full year current account deficit for FY23 at $67 billion was sharply lower than the range of $100 billion to $125 billion that was being expected around the end of September.

Breaking up the CAD of $1.3 billion for Q4FY23

If FY21 reported a small surplus in the current account and FY22 had a deficit, then FY23 has seen a much wider current account deficit at $67 billion. Let us understand how the CAD for the fourth quarter and for the fiscal FY23 were arrived at. 

Pressure on Current Account	Q4 FY23 Break-up	Fiscal FY23 Break-up	Boost to Current Account	Q4 FY23 Break-up	Fiscal FY23 Break-up
Trade Deficit	($52.60 bn)	($265.30 bn)	Services Surplus	+$39.10 bn	+$143.30 bn
Primary A/C – Interest	($12.60 bn)	($45.90 bn)	Secondary Income	+$24.80 bn	+$100.90 bn
Negative Thrust on CA	(-$65.20 bn)	(-$311.20 bn)	Positive Thrust on CA	+$63.90 bn	+$244.20 bn
			Current Account Deficit (CAD)	(-$1.30 bn)	(-$67.00 bn)

Data Source: RBI

Being the fourth quarter of the year, we have also covered the full year numbers and how the full year CAD of $67 billion was arrived at. At 2% of GDP, the full year CAD may be higher than last time, but it is a lot more comfortable than was envisaged when the September data had been reported at record CAD levels. On the positive side, while the trade deficit on the merchandise account has moderated, the trade surplus on the services account has built heft in the last one year.

How would the CAD impact the government policy response?

To be fair, the government had already taken a proactive two-pronged approach to bring the CAD under control. On the one hand, it was doing its best to encourage exports of goods and services through the PLI scheme. On the other hand, it is also following a conscious policy of import substitution. That has helped to cut the merchandise trade deficit in the non-oil space. Also, the dependence on Russian oil imports has surely helped.

One must spend a moment on the RBI dilemma. RBI has paused rates at 6.5% since February. While the RBI members of the MPC still give hawkish hints, they have held rates in the April and the June policy. If the RBI holds rates and if the US and other countries hike rates further, we could see the dollar index strengthen and the rupee consequently weakening. That is not great news as it is an invitation for imported inflation. For the RBI, it is going to be a tough call as it can give up on the growth story either.