Current Account Deficit widens to 1.1% of GDP in Q1FY24

29 Sep 2023 , 10:04 AM

Among other things, this report tells us the current account deficit (CAD) for the previous quarter. This data is typically announced with a lag of 3 months. That means; the current account deficit (CAD) for the quarter ended June 2023 is reported towards the end of September 2023. Similarly, the current account deficit for the September 2023 quarter will be reported towards the end of December 2023 and that is how the reporting cycle will go on.

For the June 2023 quarter (Q1FY24), the current account deficit (CAD) was reported at $9.2 billion. But the CAD is normally expressed as a percentage of GDP and for the first quarter of FY24, the current account deficit stands at 1.1% of the GDP. But before we go into the numbers, a quick word on what the CAD reflects. It is an extension of the trade deficit. While the trade deficit only includes the merchandise trade, the CAD also includes trade in services and other primary and secondary incomes. The table below captures the current account balance trend for the last 12 sequential quarters.

Quarter	Current Account Balance
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	$(18.00) billion
Quarter Ended September 2022	$(30.90) billion
Quarter Ended December 2022	$(18.20) billion
Quarter Ended March 2023	$(1.30) billion
Quarter Ended June 2023	$(9.20) billion

Data Source: RBI

Let us first look at the quick takeaways from the time series data on current account deficit for the last 12 quarters.

 

Key takeaways from the last 12 quarters of CAD data

The current account deficit had peaked at $30.9 billion in the September 2022 quarter, which is when the government had expressed concerns over a sharp spike in the CAD for FY23. However, the CAD was controlled in the subsequent quarters, thanks to a lower trade deficit and an improvement in the services surplus. In the last 3 years, there has been just one occasion in the June 2021 quarter, when India had reported a current account surplus, and that was due to the pressures of COVID resulting in a sharp reduction in the trade deficit. At $9.2 billion for the June 2023 quarter, the current account deficit is 1.1% of GDP. This is higher than the current account deficit reported in the sequential March quarter at $1.3 billion (0.2% of GDP), but sharply lower than the CAD of $18.0 billion (2.1% of GDP) in the year ago quarter ended June 2022.

What helped to keep the current account deficit at a reasonable level in the June 2023 quarter? Two factors favoured the current account situation in June 2023 quarter. On  yoy basis, the lower merchandise trade deficit helped. This was on account of a lower deficit in oil as well as in non-oil products. Secondly, on the services front, the services surplus was also meaningfully higher at $35.1 billion in the June 2023 quarter as compared to just $31.1 billion in the June 2022 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 offset against one another. The bigger gains were visible on the services trade front, led by IT, consultancy services and the setting up of global capability centres in India in a big way. These have substantially contributed to enhancing the services surplus of the Indian economy in the June 2023 quarter. For India, the key to a stable rupee and sustained sovereign ratings is all about keeping its CAD and its fiscal deficit in control. It is in this context that the yoy narrowing of the current account deficit has positive ramifications for the full year CAD and for rupee stability.

How the CAD components shifted in the June 2023 quarter?

The current account deficit for the June 2023 quarter is higher on a sequential basis, but sharply lower on a yoy basis. But, what really matters is that it is less than a third of the peak current account deficit (CAD) reported in the September 2022 quarter at $30.9 billion. When the September 2022 CAD was announced by the RBI, it had raised genuine concerns that the full year CAD for FY23 would cross 4% of GDP. Fortunately, that was rapidly controlled in the next two quarters. How do the components of the June 2023 compare versus the sequential quarter and the year ago quarter?

1. Firstly, the merchandise trade deficit had 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. In June 2023 quarter, the merchandise trade deficit was higher at $56.6 billion. However, on a yoy basis, it was lower compared to $63.1 billion in the June 2022 quarter. The secular falling trend in merchandise trade deficit can be attributed to lower commodity prices and weak import numbers. 

    

2. What is more interesting is that the POL (petroleum, oil, lubricants) deficit accounted for 42.9% of the overall merchandise trade deficit for June 2023 quarter. This was just 41.7% in the June 2022 quarter. Effectively, there has been a fall in the non-oil deficit in the quarter on a yoy basis; including commodities like fertilizers, coal, ores, gold, silver, alloys, and chemicals; which can be attributed to the import substitution strategy.

    

3. The big story in June 2023 (Q1FY24) quarter was the growth in services surplus. The service surplus had stood at $34.4 billion in Q2FY23, $38.7 billion in Q3FY23 and $39.1 billion in Q4FY23. In Q1FY24, the services surplus tapered to $35.1 billion due to a slowdown in exports of services amidst weak global demand on the back of slowdown concerns. However, the services surplus was still better on a yoy basis compared to $31.1 billion in the year ago quarter (Q1FY23).

    

4. Primary outflows on account of payments on investments in the form of interest and dividends narrowed sequentially from $12.7 billion in Q3FY23 to $12.6 billion in Q4FY23 and now to $10.6 billion in Q1FY24. This is on account of lower pay-outs on in-bound investments amidst falling inflows from FDI and FPI flows. The secondary income has been largely stable on a yoy basis.

Overall, the trends from the CAD story appear to be encouraging for the June 2023 quarter. The full year current account deficit for FY23 stood at $67 billion; sharply lower than the expected range of $100 billion to $125 billion. For the current fiscal FY24 the full year CAD should be under $50 billion if the current run can be maintained. That would rein in the CAD for FY24 below 1.5% of the GDP, which would be very comfortable. 

Breaking up the CAD of $9.2 billion for Q1FY24

In FY21 India had reported a small surplus on the current account. However, FY22 had a deficit, and FY23 has seen a wider current account deficit at $67 billion. Let us understand how the CAD for Q1FY24 looks and how it compares with the year ago period.

Pressure on Current Account	Q1 FY24 Break-up	Q1 FY23 Break-up	Boost to Current Account	Q1 FY24 Break-up	Q1 FY23  Break-up
Trade Deficit	($56.60 bn)	($63.10 bn)	Services Surplus	+$35.10 bn	+$31.10 bn
Primary A/C – Interest	($10.60 bn)	($8.90 bn)	Secondary Income	+$22.90 bn	+$22.90 bn
Negative Thrust on CA	(-$67.20 bn)	(-$72.00 bn)	Positive Thrust on CA	+$58.00 bn	+$54.00 bn
			Current Account Deficit (CAD)	(-$9.20 bn)	(-$18.00 bn)

Data Source: RBI

If you look at the overall current account deficit for Q1FY24, it may have widened on a sequential basis, but on a yoy basis, the deficit has nearly halved. Economists believe that the current situation places the Indian economy in something like a Goldilocks effect on the current account. That is because, the GDP is poised to grow at a rapid rate of 7-8%, expanding the base. At the same time, the focus on indigenization will cut imports while the PLI focus will boost exports of goods and services and keep the trade deficit in check and provide a boost to the services deficit. The result would be that the current account deficit as a share of GDP will follow a secular path downward. But, we have to wait and watch if that really materializes. After all, as we have seen in the past, when it comes to macro projections; there is many a slip between the cup and the lip.

How will Q1FY24 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. In the last one year, India has also played its oil cards very well so as to keep the oil import costs in check. Of course, the risk is that Brent Crude is already above $93/bbl and that could have an impact on the September 2023 quarter current account deficit (CAD).

The one major X-factor could be the rupee value. Here is why. While RBI members in the MPC are still hawkish, the RBI has held policy rates in April, June, and August to ensure that the growth engine is not disrupted. In this period, the US Fed has continued to remain hawkish. The problem is that this could lead to the dollar index strengthening 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 choice to make. It has to either relent on growth or it has to let go rupee value. The answer, probably lies somewhere in between.