India’s current account deficit will decline to $10 billion in Q1: India Ratings

As per the data analysed by the rating agency, the current account deficit would be higher than the previous quarter (Jan-March 2023 period) when it was estimated at just $1.4 billion, 0.2 percent of the GDP but it will be lower than in comparison with the country’s current account deficit during the same period of the last financial year.

New Delhi:India’s current account deficit (CAD), the gap between the value of goods and services imported by the country and its exports, is expected to be at around $10 billion during the first three months (April-June 2023) of the current financial year. According to an analysis carried out by India Ratings and Research (a Fitch Group rating agency), at this level, the current account deficit would be at 1 percent of the country’s GDP.

As per the data analysed by the rating agency, the current account deficit would be higher than the previous quarter (Jan-March 2023 period) when it was estimated at just $1.4 billion, 0.2 percent of the GDP but it will be lower than in comparison with the country’s current account deficit during the same period of the last financial year – the first quarter of the previous financial year.

In the first quarter of the previous fiscal, the current account deficit was estimated at around $18 billion which was 2.1 percent of the GDP. However, the agency expects that the current account deficit will further rise from the current level.

“India Ratings expects the current account deficit could rise further in the second quarter of FY 2023-24. The global economic environment remains uncertain amid concerns of higher-than-expected monetary tightening by central banks in advanced economies and a weaker economic recovery in China,” said Paras Jasrai, Senior Analyst, India Ratings.

Highlighting the further risk to the global economy due to the disturbances caused by extreme climatic conditions, Jasrai says there has been an additional risk of extreme weather events playing out in different countries (owing to El-Nino), which has led to an uptick in the prices of energy and some of the food commodities.

Moreover, the high-frequency indicators such as the Global Purchasing Managers Index (PMI) are not encouraging either and were in contraction mode even in July this year.

Merchandise exports to dip below $100 billion

Paras Jasrai says the agency expects the merchandise exports to dip below $100 billion after a gap of eight quarters in the second quarter of the current financial year. On the other hand, India’s merchandise imports are expected at around $163 billion during the same period, up from a seven-quarter low of $160.3 billion in the first quarter. It will mainly be on account of the increase in crude oil prices since July this year.

“All in all, India Ratings expects the goods trade deficit to come in at a three-quarter high of $64 billion in the second quarter of the current financial year.

Services export to moderate

The problem is not only limited to the fact that the country’s merchandise export would decline to below $100 billion in the current quarter, another problem is that India’s services exports has also witnessed some moderation since June 2023 due to the slowdown in global economic activity. The global services PMI stood at a five-month low of 52.7 in July 2023. Therefore the agency expects the services trade surplus to remain around $36 billion in the second quarter of this fiscal.

Export worries

According to the trade data analysed by the agency, India’s merchandise exports witnessed a contraction even in the first quarter of the current fiscal by coming 14.1 percent lower in comparison with the merchandise export during the same period of the last fiscal. This was the biggest decline in the last 12 quarters. Goods exports stood at a seven-quarter low of $104.0 billion in the first quarter as against India Ratings’ expectations of $106 billion.

What is supporting India’s exports?

Despite the concerns about the country’s merchandise exports falling below $100 billion in the current quarter, exports of some goods have been supportive. For example, in the first quarter, export of telecom instruments, ship, boat and floating structure, electronics components, drug formulations, biologicals, iron ore, spices, basmati rice, electronics instruments, other construction machinery and copper and related products were the top 10 items that supported goods exports.

While volume growth remained stronger as it ranged between 4.2 percent to 170 percent on the year-on-year basis, the value of these items grew in the range of 7.7 percent to 76.6 percent on the year-on-year basis during April-June period this year.

Merchandise imports

India’s merchandise imports reduced further to a seven-quarter low of $160.3 billion in the first quarter. The import of goods shrunk 12.7 per cent on a year-on-year basis during the same period, which is the sharpest pace since the second quarter of FY 2020-21. It was primarily due to a sharp contraction in the import of primary and consumer durable goods.

Energy prices plunged by over 38%

According to the latest trade data, while energy prices plunged by 38.5 percent on the year-on-year basis, a 12-quarter high, non-energy prices plunged by 16.6 percent on the year-on-year basis, which is a 30-quarter high. On the other hand, prices of precious metals rose by 5.8 percent on a y-o-y basis in this first quarter.

Within the non-energy import basket, the prices of items such as fertilisers, base metals, excluding iron ore, and oils and meals sank at a huge pace of 44.6 percent, 17.7 percent and 28.1 percent respectively on a year-on-year basis.