India rebounds to current account surplus in Jun-21 quarter

After many years, India had reported 3 consecutive quarters of current account surplus between Mar-20 and Sep-20, which was the peak COVID-19 impact period.

Oct 04, 2021 09:10 IST India Infoline News Service

It may sound ironic but India’s current account situation improves when COVID puts curbs on imports. After many years, India had reported 3 consecutive quarters of current account surplus between Mar-20 and Sep-20, which was the peak COVID-19 impact period. The current account surplus was very small in the Mar-20 quarter but surged to $19.79 billion and $15.51 billion in Jun-20 and Sep-20 quarters.

This was an outcome of a sharp compression in imports leading to lower trade deficit. However, with growth picking up and oil prices bouncing back, India once again reported current account deficits of $1.70 billion and $8.1 billion in the Dec-20 quarter and the Mar-21 quarter respectively. The Jun-21 quarter was marked by COVID 2.0 and the current account has reverted to a surplus of $6.5 billion or 0.9% of GDP.

Chart Source: RBI

In the Jun-21 quarter, India recorded current account surplus of $6.5 billion or 0.9% of GDP. This is distinctly lower than the current account surplus of $19.79 billion in the yoy Jun-20 quarter. However, the Jun-21 surplus is a stark improvement from the deficit of $8.5 billion in the sequential Mar-21 quarter. There were two key reasons for the current account bouncing back to surplus in Jun-21 quarter. Notwithstanding crude prices elevated levels, the overall imports were kept under check due to weak demand amidst COVID 2.0. However, exports got a boost from revival in global markets, especially the huge demand for steel and other commodities.

The second reason for the bounce to a current account surplus in the Jun-21 quarter was the rebound in services trade. The services surplus was almost 20% higher on a yoy basis and that was largely supported by traction in terms of IT execution and digital projects demand for Indian IT. NRI remittances were also sharply higher sequentially and yoy.

How the current account reverted to surplus in Jun-21 quarter

At a macro level, India reported current account surplus for fiscal year FY21, due to the $35 billion surplus reported in the Jun-20 and Sep-20 quarters combined. COVID 2.0 did help India revert to a current account surplus in the Jun-21 quarter. The unique feature about COVID 2.0 was that it hit the Indian economy harder than the global economy. Hence, export demand for merchandise goods and services remained robust but imports took a hit. Here is a quick analysis of the $6.5 billion on the current account surplus in Q1.
Pressure on Current Account (CA) Amount Boosting the Current Account (CA) Amount
Q4 Trade Deficit ($30.70 bn) Q4 Export of Services +$25.80 bn
Primary A/C - Interest ($7.60 bn) Secondary Income +$19.00 bn
Negative Thrust on CA (-38.30 bn) Positive Thrust on CA +$44.80 bn
Current Account Surplus (+$6.50 bn)
Data Source: RBI

The turnaround from current account deficit in Mar-21 quarter to a current account surplus of $6.5 billion is a big improvement sequentially. The real boost came from reduced fiscal deficit, which fell from $41.70 billion to just $30.70 billion in Jun-21 quarter. While the imports did weaken during the COVID 2.0 period, the government efforts to boost exports has taken monthly median exports to all-time high levels. That also helped the cause.

However, it is not just about the tapering of the merchandise trade deficit. The export of services played a big part as the IT sector led the sharp growth in service exports. This is also evident from the positive growth guidance given by most IT majors offering visibility of better global demand traction. The primary account consisting of net interest outflows also tapered from $8.70 billion in the Mar-21 quarter to $7.60 billion in the Jun-21 quarter. That has also contributed significantly to the current account deficit of Mar-21 quarter turning around to a current account surplus in the Jun-21 quarter.

Major takeaways from the current account data for Jun-21 quarter

Here are some 5 key takeaways from the current account data for Jun-21 quarter.
  • The trade deficit for the Jun-21 quarter tapered by almost 25% on a sequential basis as COVID 2.0 reduced the pressure on merchandise imports.
  • After nearly doubling sequentially in Mar-21 quarter, the primary account, representing interest outflows, tapered by $1.1 billion, giving cash flow respite.
  • The trade deficit situation should improve significantly once the full impact of “Make in India” is captured. However, it could lead to some front-ending of import demand.
  • The GDP data for the Jun-21 quarter had already given indications that the improved GDP growth was being largely driven by growth in trade.
  • The one area of concern is that trade deficit has widened sharply in the Sep-21 quarter. For example, India has reported record trade deficit of $23 billion in the month of Sep-21 and that is likely to exert pressure on the current account situation in Q2.
The Jun-21 current account surplus may be an outcome of a growth slowdown and the real picture will be evident in Q2, since oil and gold imports have surged sharply.

Related Story

Open Free Demat Account (Rs699)