An unprecedented $19.8 billion current account surplus in Jun-20 quarter
For a very long time, the Indian economy had got used to the concept of current account deficits. The chart above captures the quarterly current account balance over the last 25 years since1995. Barring the brief interlude between 2004 and 2007, the current account has predominantly been in deficit. It is in this light that the $19.8 billion current account surplus assumes significance.
In the Indian context, it is the merchandise trade deficit that has been the reason for current account deficit. With India relying on imports to satiate ~80% of its daily crude oil needs, any spike in oil prices was a recipe for current account deficit. While oil prices have been tepid for the last five years, the Coronavirus pandemic created a situation where the imports have fallen sharply across the board. The pandemic has negatively impacted remittances from abroad but service exports have more than made up.
|Pressure on Current Account||Amount||Boosting the Current Account||Amount|
|Q4 Trade Deficit||($10.02 bn)||Q4 Export of Services||+$20.50 bn|
|Primary A/C - Interest||($7.70 bn||Secondary Income||+$17.01 bn|
|Negative Thrust on CA||(-17.72 bn)||Positive Thrust on CA||$37.51 bn|
|Current Account Surplus||$19.79 bn|
The table above captures how the current account generated a record surplus of $19.8 billion in Jun-20 quarter. Remember, the surplus was just $584 million in Mar-20 quarter so that is a massive boost. The positive thrust from service exports and secondary income has been substantially more than the negative thrust exerted by the merchandise trade deficit and interest payouts.
How the current account reported a record surplus in Jun-20 quarter
Here is what actually contributed to the record surplus on the current account for the first quarter ended Jun-20.
• The current account surplus for Q1 of FY21at $19.8 billion represents a whopping 3.9% of the GDP. This is tremendous momentum because only in the Mar-20 quarter, India had reported the first current account surplus since the year 2007.
• The single big factor contributing to the huge current account surplus was the sharp fall in the merchandise trade deficit. For the Jun-20 quarter, the merchandise trade deficit was just (-$10.02 bn) compared to ($-46.77 bn) in the Jun-19 quarter.
• For the Jun-20 quarter, the services trade surplus was almost at par with last year at $20.51 billion. However, when combined with merchandise trade deficit, there was an overall trade surplus of $10.49 billionas against an overall deficit of ($26.7) billion in Jun-19 quarter.
• One of the best current account surpluses that India had ever recorded in absolute terms was the surplus of $4.2 billion in the fourth quarter of 2006-07. Compared to that, this Jun-20 surplus on the current account is nearly five times bigger.
• Within the overall reduction in trade deficit, a big contributor was the non-monetary gold deficit due to weak gold demand in India. The gold deficit in Jun-20 quarter fell from $11.45 billion last year to just about $670 million this year.
• In the Jun-20 quarter, it was the net surplus on software, computers and telecom that accounted for the entire advantage. In the midst of the slump in merchandise imports, the net surplus from IT services remained robust at $21.13 billion.
• In a tough quarter ending on Jun-20, the actual payout of interest and dividends on investments was higher by 20% YOY at $7.70 billion. However, the robust performance of service exports more than compensated for it.
• Workers’ remittances remain a major factor in keeping the current account comfortable. Due to the combined impact of COVID and low oil prices, the gulf remittances took a hit of almost 20% on a YOY basis.
Not really a flash in the pan
When the current surplus for the Mar-20 quarter came in at $584 million, the first question was whether it was a flash in the pan. Clearly, the current account surplus of $19.8 billion in the Jun-20 quarter reinforces that there is a larger positive story building on the current account. With oil prices likely to remain subdued, we could see the current account surplus sustaining. That would mean a stronger rupee and also prospects of a sovereign rating upgrade when the dust of COVID-19 settles. But, that may still be some time away.