India reports current account surplus for third quarter in a row

Not only has the current account surplus strengthened in Jun-20 but almost sustained in Sep-20. It is hard to recollect the last time India reported 3 successive quarters of current account surplus.

Dec 31, 2020 10:12 IST India Infoline News Service

It is a rare occasion to see current account surplus in the Indian context. When India announced a current account surplus in Mar-20 after a gap of almost 13 years, most sceptics dismissed it as a flash in the pan. However, not only has the current account surplus strengthened in Jun-20 but almost sustained in Sep-20. It is hard to recollect the last time India reported 3 successive quarters of current account surplus.

Chart Source: RBI

Three quarters consecutive surplus in current account

The current account reported a very modest surplus of $0.58 billion in Mar-20 quarter. However, it strengthened to a surplus of $19.79 billion in the Jun-20 quarter. The Sep-20 quarter current account surplus at $15.51 billion is lower but well above the most optimistic estimates of economists. What exactly does this current account surplus represent?
The current account is an expanded version of the trade account. The trade account purely considers export and imports of merchandise goods; or what we call physical goods. The current account, on the other hand, also considers trade in services, inward remittances, interest and dividend payments and income from foreign investments. In short, a current account deficit indicates that you are borrowing for your morning breakfast.

What triggered this surplus in the current account?

Between 1995 and 2020, the current account has been in deficit for a better part of this period. There was a brief interlude between 2004 and 2007 when the current account was in surplus and this is only the second time in last 25 years that we have seen 3 successive quarters of current account surplus. Here is how the surplus was generated in Sep-20.

Pressure on Current Account Amount Boosting the Current Account Amount
Q4 Trade Deficit ($14.80 bn) Q4 Export of Services +$21.21 bn
Primary A/C - Interest ($9.30 bn) Secondary Income +$18.40 bn
Negative Thrust on CA (-24.10 bn) Positive Thrust on CA +$39.61 bn
Current Account Surplus +$15.51 bn
Data Source: RBI

In the Sep-20 quarter, the pressure came from the 50% increase in the trade deficit due to the post-pandemic growth picking up leading to higher crude prices. Of course, the services surplus was higher in the Sep-20 quarter as were the remittance inflows during the quarter. However, higher trade deficit and higher payout on investments led to the current account surplus shrinking sequentially to $15.51 billion from $19.79 billion.

Key takeaways from the Current Account Surplus story for Sep-20

Here is a quick look at some of the important current account related numbers for the Sep-20 quarter and the first half of FY21.
• The current account surplus for Q2 of FY21 at $15.51 billion represents 2.4% of the GDP for the quarter. It would be commendable if India can end the fiscal year 2020-21 with an overall current account surplus in the midst of the trying pandemic times.

• The reason the current account surplus narrowed from $19.8 billion to $15.5 billion was the widening of the trade deficit due to the revival in growth post the pandemic and higher crude prices leading to a higher deficit on POL imports.

• For the Sep-20 quarter, the services trade surplus improved on the back of robust software exports. At the same time, the pandemic did not have a very deep impact on remittances as they actually bettered the Jun-20 figures.

• For the first half of FY2020-21, India has reported current account surplus of $34.8 billion as compared to a deficit of $22.5 billion in the corresponding period last fiscal. That was largely triggered by a reduction in the trade deficit during this period from $86.4 billion to $25.6 billion; almost a 70% narrowing of trade deficit.

• Private remittances at $35 billion in the first half of the current fiscal year 2020-21 was nearly 10% lower than last year. While this is pandemic related, it must be said that the negative impact on remittances has been much lower than anticipated.

What is the outlook for the current account?

In an earlier piece, 6 months back, we had questioned whether the Mar-20 current account surplus was a flash in the pan or a genuine structural shift. It now looks like there has been a genuine structural shift. The lower volumes of trade have benefited the current account to the extent that it does not have to put up with the massive oil deficits. While oil deficit may increase in the coming quarters, there are also positives at work.

The exports of pharmaceuticals and chemicals are expected to increase as the vaccination drive gathers momentum. Also, a sharp revival in IT spending would mean India gets a bigger chunk of global IT exports. If the Atma Nirbhar “Make in India” project really takes off, it could be the icing on the cake for the current account. For now, it is good enough that India has reported 3 successive quarters of current account surplus!

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