India Q1FY25 Current Account Deficit rises to 1.1% of GDP

1 Oct 2024 , 12:32 PM

INDIA BACK TO $9.7 BILLION CAD IN Q1FY25

After the brief surplus in the fourth quarter of FY24, the current account was back in deficit in the first quarter of FY25. As is the normal practice, the RBI reported the current account deficit (CAD) for the first quarter ended June 2024 on the last working day of September 2024. It may be recollected that in the fourth quarter of FY24, the RBI had reported a current account surplus of $5.7 Billion or 0.6% of the GDP. This has been later revised lower to $4.6 Billion or 0.5% of GDP. It was special because it was the first current account surplus since June 2021 quarter.

However, there were no such celebrations in Q1FY25 as the current account deficit came in at #9.7 Billion, much wider than the current account deficit of $8.9 billion in the corresponding period last year. Of course, since this is the first quarter, cumulative CAD for FY25 is still not relevant. Just to refresh our memories, the current account deficit is a combination of merchandise trade deficit adjusted for services account surplus, interest payments towards dividend / interest as well as remittances coming into India. These four items combine to create the current account deficit. We will look at the granular break-up of these items separately.

SOME CAD REVISIONS AND SOME CAD COMPARISONS

Let us now look at some yoy and MOM revisions first. The current account deficit for Q1FY24 was raised from $8.60 Billion to $8.90 Billion. At the same time, the current account surplus for Q4FY24 was scaled down from $5.7 Billion to $4.6 Billion; making it just 0.5% of GDP rather than at 0.6% of GDP. How does the you and MOM comparison of the current account deficit look like. If you look at the Q1FY25 current account deficit at $9.7 Billion, it is wider than the year ago current account deficit at $8.9 Billion and a substantial negative turnaround on an MOM basis. Between Q4FY24 and Q1FY25, the current account has moved from a surplus of $4.6 Billion to a current account deficit of $9.7 Billion. Clearly, the pressure created by the merchandise trade deficit could not be effectively offset by the surplus on the services trade account or by the inward remittances into India.

CAD STORY OVER LAST 12 QUARTERS

The table captures the current account balance trend for the last 12 sequential quarters.

Quarter	Current Account Balance
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	$(16.80) Billion
Quarter Ended March 2023	$(1.30) Billion
Quarter Ended June 2023	$(9.20) Billion
Quarter Ended September 2023	$(8.90) Billion
Quarter Ended December 2023	$(8.70) Billion
Quarter Ended March 2024 #	$4.60 Billion
Quarter Ended June 2024	$(9.70) Billion

Data Source: RBI (# Current Account Surplus Revised lower from $5.70 bn to $4.60 bn)

Here are some of the major takeaways from the current account deficit of last 12 quarters.

• India has reported a current account deficit of $(9.70) Billion in Q1FY25, after reporting a current account surplus of $4.60 Billion (revised lower from $5.70 Billion) in Q4FY24. Incidentally, in Q4FY24, the RBI had reported the first current account surplus since the June 2021 quarter. The previous 3 current account surpluses (prior to March 2024) had come during the pandemic, so effectively, March 2024 was the first current account surplus in the last 18 years during normal market conditions.
• The current account surplus in Q4FY24 and the subdued current account deficit of 0.7% of GDP for FY24 overall was triggered by several factors. It can broadly be attributed to Russian oil imports, fall in global commodity prices and a surge in the service surplus. In addition, the “Atma Nirbhar Bharat” strategy of import substitution has also been effective in curbing imports. Once concerns, which we will again take up later, is the rising incidence of gold imports which had normalized in the last few quarters. However, gold, and silver imports appear to be surging; thanks to the UAE CEPA route.
• There was a key revision of the data in the sequential March 2024 quarter. The original estimate of current account surplus at $5.7 Billion was later revised and scaled down to $4.6 Billion as the effective merchandise trade deficit was revised upwards. That also meant that the current account surplus for the four quarter of FY24 was also lowered from 0.6% of GDP to just 0.5% of GDP.
• Why did India move from a surplus to a deficit in the first quarter of FY25. Merchandise trade deficit was sharply higher while the inward remittances were sharply lower. Otherwise, the impact of the services surplus and the interest and other investment payouts was fairly limited on the overall CAD figure. However, the one thing that the government will have to be cautious about is the composition of the merchandise trade deficit. One example is the sharp spike in gold and silver imports in recent months.

Overall, it was a mix of factors that widened the current account deficit in the first quarter of FY25, but it was largely about the sharp spike in the merchandise trade deficit.

HOW CAD BASKET SHIFTED YOY IN JUNE 2024 QUARTER?

Here we look at the break-up of the current account surplus for the June 2024 quarter (Q1FY25) and how it shifted on a yoy basis compared to the year-ago first quarter (Q1FY24).

Pressure on Current Account	Q1 FY25 Break-up	Q1 FY24 Break-up	Boost to Current Account	Q1 FY25 Break-up	Q1 FY24 Break-up
Trade Deficit	($65.10 bn)	($56.70 bn)	Services Surplus	+$39.70 bn	+$35.10 bn
Primary A/C – Interest	($10.70 bn)	($10.20 bn)	Secondary Income	+$26.40 bn	+$22.90 bn
Negative Thrust on CA	(-$75.80 bn)	(-$66.90 bn)	Positive Thrust on CA	+$66.10 bn	+$58.00 bn
		Current Account Surplus / (Deficit)		($9.70 bn)	(-$8.90 bn)

Data Source: RBI

The current account, on a yoy basis, widened from a deficit of $-8.90 Billion in Q1FY24 to a deficit of $-9.70 Billion in Q1FY25. Here is what triggered this widening of deficit.

• Firstly, the June 2024 merchandise trade deficit at $(65.10) Billion was sharply higher than the $(50.90) Billion merchandise trade deficit in the March 2024 quarter. The trade deficit was also sharply wider when compares with $(56.70) Billion in the year-ago quarter. This is largely on account of higher average crude prices, as the benefits of the Russian crude discounts have been gradually waning now. Between, the sequential quarter, the Red Sea crisis has had an impact on the volumes of trade, although that has hit the exports as well as the imports of merchandise goods in the quarter. However, in the case of imports, it has added substantially to the cost of imports on account of a spike in the freight and the insurance related costs.
• One major risks that is hitting trade is the strife in the Middle East and West Asia. Most of the large shipping lines are avoiding the Red Sea route and taking the much longer Horn of Africa route. Now, that is not only adding to delivery times, but also resulting in higher cost of transport, higher fuel costs, and higher insurance and interest costs for the intervening period. In recent weeks, the aggressive attacks by Israel on Lebanon is only worsening the equations in the Middle East and West Asia.
• The interesting story in June 2024 quarter (Q1FY25) quarter was the rather mixed performance of the services trade basket. For instance, the services trade surplus in Q1FY25 at $39.7 Billion was sharply higher than $35.1 Billion in the year ago period. However, the short term picture was not that encouraging with the Q1FY25 services surplus being lower than the record services surplus of $42.70 Billion reported in Q4FY24. Sequentially, the services surplus has been hit by a slowdown in global demand for most services. Of course, on a secular basis, the slowdown in core IT services has been substantially neutralized by the focus on AI and new technologies apart from niche areas like global capability centres, data centres etc. While in Q1FY25, the services surplus managed to wipe out a chunk of the merchandise trade deficit, it is increasingly struggling as the trade deficit has been persistently rising.
• Primary outflows on account of payments on investments in the form of interest and dividends were marginally higher on a yoy basis in Q1FY25 at $10.7 Billion compared to $10.2 Billion in the year ago period. However, the good news is that this payout on investments has fallen sharply on a sequential basis from $14.80 Billion in Q4FY24. This is on account of lower pay-outs on in-bound investments amidst falling inflows from FDI and FPI flows. However, on the positive side, the secondary income reflected by the remittances from abroad into India has risen to $26.4 Billion in Q1FY25 as compared to $22.9 Billion in the year ago period. However, even this figure was sequentially lower as compared to $28.70 Billion in Q4FY24. Clearly, it looks like expat Indians have cut their bets on India in the latest quarter amidst rising global uncertainty.

Overall, the trends from the current account story appear to be slightly more worrying for the June 2024 quarter as compared to the March 2024 quarter. If you recollect, the full year current account deficit for FY24 was sharply lower at $23.20 Billion as compared to the FY23 full year CAD of $67.00 Billion. In FY24, the fervent hope was that the full year fiscal deficit should be managed within 1% of GDP. However, thanks to the revised CAD in Q3 and the current account surplus in Q4, the full year current account deficit for FY24 came in at just about 0.7% of GDP. Can the magic of FY24 be repeated in FY25, as far as the current account deficit is concerned. Let us start by looking at the projections for the second quarter of FY24 since we now have data for two months of July and August. There has been a distinct worsening of the current account position in the second quarter. Here is a quick dekko at what this means for the second quarter CAD for September 2024 quarter.

CAD MAY WIDEN IN THE SECOND QUARTER OF FY25?

In India, the Directorate General of Foreign Trade (DGFT) reports the merchandise trade data and extrapolated services trade data on a monthly basis and on a cumulative basis for the fiscal year. The services trade data is reported by the RBI with a lag of one month, which is used by DGFT to extrapolate for the current month. Here, with 5 months of data, one can get a fair extrapolation of the picture for the Q2FY25 and for full fiscal year FY25.

Macro Variables (Year-to-Date)	FY25 (Apr-Aug)	FY25 (Apr-Jul)	FY24 (Apr-Aug)	Change YOY (%)
Merchandise Exports	178.83	144.12	176.67	1.22%
Merchandise Imports	294.06	229.70	275.83	6.61%
Total Merchandise Trade	472.89	373.82	452.50	4.51%
Merchandise Trade Deficit	-115.23	-85.58	-99.16	16.21%
Services Exports	148.04	117.35	135.50	9.25%
Services Imports	78.65	62.95	74.28	5.88%
Total Services Trade	226.69	180.30	209.78	8.06%
Services Trade Surplus	69.39	54.40	61.22	13.35%
Combined Exports	326.87	261.47	312.17	4.71%
Combined  Imports	372.71	292.65	350.11	6.46%
Overall Trade Volume	699.58	554.12	662.28	5.63%
Overall Trade Deficit	-45.84	-31.18	-37.94	20.82%

Data Source: DGFT and RBI (Trade data in Billion $)

The above data is the latest trade data for the first 5 months of FY25 i.e. from April to August 2024 and presented in a cumulative manner.

• In the first quarter of FY25, the merchandise trade deficit stood at $65.1 Billion. This has burgeoned to $115.2 Billion by end of August 2024. That means the economy has added merchandise trade deficit of $50.1 Billion in just 2 months so we can extrapolate the second quarter merchandise trade deficit at closer to $75 Billion, which will be sharply higher than the first quarter. This will be partially triggered by the spike in oil prices and a spike in freight and insurance costs. However, this is also attributed to the sharp spike in gold and silver imports thanks to the CEPA treaty signed with UAE.
• Let us now turn to the services surplus for the 5 month period of FY25. The service surplus for the 5 months of FY25 stands at $69.4 Billion, of which $39.7 Billion was achieved in the first quarter. So, we are looking at a best case services surplus of around $44 billion in the second quarter. That will be higher than Q1, but not enough to meaningfully offset the merchandise trade deficit. For example, if the current extrapolations hold, we may end up with a merchandise trade deficit of $75 Billion in Q2FY25 and a services trade surplus of $44 Billion. That will leave a gap of $31 billion to be filled up. Even assuming that the remittances and investment related outflows remain constant, we could still end up with a current account deficit between 1.5% and 1.7% of GDP in the second quarter. There are also pessimistic estimates coming in of second quarter CAD coming at 2% of GDP, but that does look tad unrealistic at this point of time. We have to wait and watch.

We finally look at the Million dollar question; What does this array of data mean for the current account deficit (CAD) for the full fiscal year FY25? It looks like the current account deficit (CAD) for FY25 could be wider than in FY24, but closer to the CAD achieved in FY23.

FALLING OIL PRICES COULD SAVE THE CAD SITUATION

In the midst of the din and pessimism, there is one X-factor that could make a big difference to the CAD in Q2 and in FY25; and that is oil prices. Brent Crude prices have already fallen from $90/bbl to $71/bbl. This is yet to be factored into the CAD calculations. There are expectations that OPEC may restore normal supplies as they are, anyways, exerting limited influence on oil prices. A supply surge could be just the answer to India’s CAD concerns.