India Q2FY25 Current Account Deficit almost flat at 1.2% of GDP

30 Dec 2024 , 03:02 PM

Q2FY25 CAD AT 1.2% OF GDP: BUT Q3 COULD BE CHALLENGING

The current account deficit (CAD) for second quarter ended September 2024 was better than expected. Most economists had projected CAD in the region of 1.6% of GDP in Q2, worsening further to 2.2% in Q3. However, as the table below depicts, the latest CAD for the September quarter has remained almost flat at $11.2 Billion or 1.2% of GDP.

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	$(17.95) Billion
Quarter Ended September 2022	$(30.89) Billion
Quarter Ended December 2022	$(16.82) Billion
Quarter Ended March 2023	$(1.34) Billion
Quarter Ended June 2023	$(8.95) Billion
Quarter Ended September 2023	$(11.26) Billion
Quarter Ended December 2023	$(10.42) Billion
Quarter Ended March 2024	$4.59 Billion
Quarter Ended June 2024	(9.74) Billion
Quarter Ended September  2024	$(11.20) Billion

Data Source: DGFT / RBI (Previous figures revised where applicable)

The current account deficit (CAD) touched a peak of $30.89 Billion in September 2022, but has largely sobered since. As we shall see in the subsequent section, the merchandise (goods) trade deficit has surely been higher in Q2FY25. However, that has been largely offset by higher surplus on the services account as well as higher remittances coming in from abroad. That saved the day for the CAD.

HOW CAD BASKET SHAPED UP IN SEPTEMBER 2024 QUARTER?

Here is the break-up of the current account deficit for the September 2024 quarter (Q2FY25) and how it shifted yoy compared to the year-ago quarter (Q2FY24).

Pressure on Current Account	Q2 FY25 Break-up	Q2 FY24 Break-up	Boost to Current Account	Q2 FY25 Break-up	Q2 FY24 Break-up
Trade Deficit	($75.30 bn)	($64.50 bn)	Services Surplus	+$44.50 bn	+$39.90 bn
Primary A/C – Interest	($9.50 bn)	($11.60 bn)	Secondary Income	+$29.10 bn	+$24.90 bn
Negative Thrust on CA	(-$84.80 bn)	(-$76.10 bn)	Positive Thrust on CA	+$73.60 bn	+$64.80 bn
		Current Account Surplus / (Deficit)		($11.20 bn)	(-$11.30 bn)

Data Source: RBI

Here are quick thoughts on the break-up of CAD for Q2FY25.

• September 2024 merchandise trade deficit at $(75.30) is progressively higher compared to $(65.10) Billion in June 2024 quarter and $(50.90) Billion in March 2024 quarter. Even on yoy basis, the merchandise trade deficit was much wider. This can be attributed to higher imports of gold and crude, but also to the spike in import costs on account of higher freight costs and higher insurance costs amidst supply chain constraints placed due to disruptions in the Red Sea route.
• This spike in merchandise trade deficit was more than compensated by 3 factors as can be seen in the above table. Firstly, the services surplus for Q2FY25 is up 11.5% yoy due to strong traction in software exports. The primary account outflows on account of interest is lower due to reduced foreign investments in India. More importantly, the secondary income representing remittances from abroad is higher by 16.9% yoy.

It is actually the offsetting impact of services surplus, inward remittances and reduced interest outflows that have kept the CAD in check, despite a spike in goods trade deficit.

CAD UPDATE FOR FIRST HALF OF FY25

Here is the break-up of current account deficit for H1-FY25 and how it shifted yoy compared to the year-ago quarter (H1-FY24).

Pressure on Current Account	H1-FY25 Break-up	H1-FY24 Break-up	Boost to Current Account	H1-FY25 Break-up	H1-FY24 Break-up
Trade Deficit	($140.40 bn)	($121.20 bn)	Services Surplus	+$84.20 bn	+$75.10 bn
Primary A/C – Interest	($20.70 bn)	($21.80 bn)	Secondary Income	+$55.50 bn	+$47.80 bn
Negative Thrust on CA	(-$161.10 bn)	(-$143.00 bn)	Positive Thrust on CA	+$139.70 bn	+$122.90 bn
		Current Account Surplus / (Deficit)		($21.40 bn)	(-$20.10 bn)

Data Source: RBI

The picture of current account deficit in H1FY25 is largely similar to the situation in the second quarter of FY25. The merchandise trade deficit has spiked sharply, but that has been largely offset by a rise in the services surplus as well as higher remittances from abroad. These two factors have ensured that the overall impact on current account deficit (CAD) is mellowed and it stays just above 1% of GDP for the first half. However, the second half of FY25 will be a lot more crucial, if you look at the progression of the monthly trade data.

WILL THE CAD ACTUALLY GET WORSE IN H2FY25?

While the CAD gets announced every quarter (with a lag of 3 months), the merchandise and services trade data gets reported monthly by the Ministry of Commerce. The overall deficit is one of the key drivers of the current account deficit (CAD) and that data is available till November 2024. Hence, we can use that as a reasonable extrapolation for FY25.

Macro Variables (Year-to-Date)	FY25 (Apr-Nov)	FY25 (Apr-Oct)	FY24 (Apr-Nov)	Change YOY (%)
Merchandise Exports	284.31	213.22	278.26	2.17%
Merchandise Imports	486.73	350.66	449.24	8.35%
Total Merchandise Trade	771.04	563.88	727.50	5.98%
Merchandise Trade Deficit	-202.42	-137.44	-170.98	18.39%
Services Exports	251.94	180.00	220.08	14.48%
Services Imports	132.47	97.39	116.01	14.19%
Total Services Trade	384.41	277.39	336.09	14.38%
Services Trade Surplus	119.47	82.61	104.07	14.80%
Combined Exports	536.25	393.22	498.34	7.61%
Combined  Imports	619.20	448.05	565.25	9.54%
Overall Trade Volume	1,155.45	841.27	1,063.59	8.64%
Overall Trade Deficit	-82.95	-54.83	-66.91	23.97%

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

What do the numbers tell us about likely full year CAD for FY25. Assuming that the offsetting impact of services surplus and foreign remittances remain strong, India could end FY25 in the range of CAD at 1.4% to 1.5% of GDP. Of course, if it looks likely to worsen, the government can also slow down the import engine. Either ways, it will be a challenging, and an interesting, second half of FY25 for the CAD.