What exactly does the current account represent?
Most of us understand the concept of trade deficit quite well. It is the difference between the merchandise exports and the merchandise imports. India has traditionally run a trade deficit as itimports nearly 80% of daily crude oil requirements. Current account is a much broader concept than trade deficit. The current account includes all foreign transactions of India and it includes items like interest, dividend, foreign remittances, foreign transfers, foreign aid etc.
|Pressure on Current Account||Amount||Boosting the Current Account||Amount|
|Q4 Trade Deficit||$35.0 bn||Q4 Export of Services||$22.0 bn|
|Primary A/C - Interest||$4.8 bn||Secondary Income||$18.4 bn|
|Negative Thrust on CA||(-39.8 bn)||Positive Thrust on CA||$40.0 bn|
|Current Account Surplus||$0.60 bn|
The current account gap is the revenue gap that the budget needs to fill up. Fiscal deficit is the gap on the current and capital account so a fiscal deficit is still understandable. However, a current account deficit represents that the revenues are not sufficient to meet the regular outflows. Normally, a high current account deficit is a precursor to the weakening of the rupee and also to a possible sovereign downgrade. That is why this number assumes a lot more significance than the trade deficit.
Why the current account moved into a surplus in Q4 of FY20?
Here are the some of the key reasons why the current account shifted to a surplus in the fourth quarter of FY20.
• The current account surplus for Q4 of FY20 was a marginal $0.6 billion representing just 0.1% of the GDP. This is the first current account surplus that India has reported in the last 13 years with the last such surplus being reported in the fiscal year 2007.
• One of the main reasons for the improvement in current account came from the trade front. The average trade deficit per month in FY20 fell from $15 billion to $13 billion. This was triggered by lower crude prices as well as a fall in overall trade due to the global economic slowdown.
• The other reason for the sharp improvement in the current account situation was the invisibles and the services segment. A surge in private transfers combined with a surge in software service exports resulted in a positive tilt to the current account.
• The fourth quarter current account surplus of 0.1% for FY20 compares favourably with the current account deficit of 0.7% in the fourth quarter of FY19. It may be recollected that in the fourth quarter of 2006-07, India had reported an overall current account surplus of $4.2 billion.
• The two areas of the invisibles that showed positive traction were software service exports and inward remittances from NRIs. For example, software service exports were up by 9% at $21.1 billion while inward remittances were up by 14.1% at $18.6 billion.
• For the fourth quarter ended March 2020, the trade deficit came in at $35 billion while the net invisibles receipt for the fourth quarter stood at $35.6 billion leaving a small surplus of $0.6 billion. The corresponding figure was a $4.6 billion deficit last year.
• Another important contributor was the fall in the primary account which represents the interest payable on inward investments. That fell by $2.1 billion to $4.8 billion in the fourth quarter, which also contributed to the current account surplus.
• On a full year basis, the current account deficit stood at 0.9%, largely due to the contribution of the fourth quarter. This compares with a full year current account deficit of 2.1% in the previous financial year.
While a current account surplus is reason to celebrate, there are two likely risks that Indian economy may have to contend with. Firstly, the pick-up in growth globally could lead to a spurt in crude prices and that will change the narrative on the trade deficit front. Secondly, the remittances are likely to slow this year due to an overall slowdown in global economies and that will also be an overhang. For now, India just about has reasons to celebrate!