Economy

Barclays Bank sees ‘unwelcome’ trade surplus

Our Bureau Mumbai | Updated on May 19, 2020

Lockdown induced current account surplus peeged at $19.6 billion in FY21

India may see a small current account deficit of about $3 billion in Q1 (April-June) 2020, followed by successive ‘unwelcome’ surpluses as imports plunge in line with the severe demand shock and the fall in global commodity prices caused by the Covid-19 pandemic and containment measures, according to Barclays Research.

Barclays has raised its current account surplus forecast to $19.6 billion (0.7 per cent of GDP) for FY21, from $10 billion previously. The last time the country had a current account surplus was in the first quarter of 2006-07.

“This year, India appears likely to post a current account surplus — an unwelcome development because the surplus will be driven almost entirely by the lockdown of the economy to contain the Covid-19 outbreak, and helped by the plunge in oil prices,” the report said.

Current account surplus arises when a country’s total export of goods, services and transfers is greater than imports. Current account deficit arises when a country's total import of goods, services and transfers are greater than exports.

“While low oil prices are serving as a tailwind for the economy, we think the bigger impact on the current account balance will come from reduced demand for both oil and non-oil imports.

“Hits from the Covid-19 outbreaks in the US and Middle East are, however, likely to be reflected negatively in India’s services trade balance as well as remittance inflows,” said Rahul Bajoria of Barclays Securities (India) Private Ltd and Shreya Sodhani of Barclays Bank, Singapore, in the report.

According to the report, surging capital inflows through H2 (second half) 19 have reversed in last two months, but will likely stabilise in H2 FY20-21, and result in only a modest capital account surplus.

“We still expect an overall BoP (balance of payments) surplus of about $38 billion in FY21.

“We think India’s level of foreign reserves will also continue to provide a strong buffer against excessive currency weakness, and will likely exceed $500 billion by end-FY20-21,” said the authors of the report.

BoP is the statement of all transactions made by a country with the rest of the world.

Barclays’ US economists expect IT spending to collapse in 2020, a development that will likely reduce India’s services exports.

“We expect India’s services exports to return to their earlier strength from H2 FY21, which should help the trade surplus to remain resilient, at $79 billion, in FY21 (FY20: $84.4 billion), along with likely dramatic decline in India’s demand for international services (eg, tourism, education) in the near term,” the report said.

Remittances

Remittances from foreign workers plunged during 2015-16, when oil prices were low, but the authors think the decline in remittances will be less severe in the near term.

“In our view, workers returning permanently and some who are unsure of being able to return to foreign jobs are likely to bring back their savings, but in the medium term, if more overseas workers return once the pandemic subsides, this may mean remittances decline with a lag,” they said.

FDI to be a little stronger

The report expects portfolio inflows to remain volatile this year, but Foreign Direct Investment (FDI) to be a little stronger. FDI inflows remained elevated through March and are likely to grow at a strong pace in the near-term, especially boosted by investments into Reliance Industries owned Jio Platforms, it added.

In the past month, Reliance Industries has signed stake sales worth nearly $9 billion with four investors, including Facebook Inc and three private equity firms. Following approvals and clearances, this money is likely to flow through in the next few months.

Published on May 19, 2020

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like