Shrinking gap. India’s current account deficit narrows to 0.2% of GDP on moderation in trade deficit

India’s current account deficit (CAD) narrowed to 0.2 per cent of GDP in the fourth quarter (January-March) of FY23 from two per cent of GDP in the preceding quarter due to a moderation in the trade deficit, coupled with robust services exports.

CAD occurs when the value of imports of goods/ services/ investment incomes is greater than the value of exports. It can weaken a country’s currency, making imports costly and can have inflationary effect in the economy.

India’s CAD was at 1.6 per cent of GDP a year ago. So, the CAD in Q4 FY23 has tapered even vis-a-vis the year ago period.

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In absolute terms, the CAD decreased to $1.3 billion in Q4 FY23 against $16.8 billion in Q3 FY23 and $13.4 billion in Q4FY22.

Trade deficit moderated to $52.6 billion in Q4 FY23 from $71.3 billion in Q3 FY23, coupled with robust services exports ($39.1 billion vs $38.7 billion).

Private transfer receipts, mainly representing remittances by Indians employed overseas, increased to $28.6 billion, up by 20.8 per cent from their level a year ago.

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The continued moderation in the current account deficit in the reporting quarter came through a record high services trade surplus and a narrowing of the goods trade deficit, Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays.

CAD widens in FY23

CAD for 2022-23 widened to two per cent of GDP as compared with a deficit of 1.2 per cent in 2021-22 as the trade deficit widened to $265.3 billion from $189.5 billion a year ago.

“Current account dynamics are expected to improve on average in the current year. We forecast the CAD to print lower in FY24: both export and import values are expected to soften owing to weak external demand and lower international commodity prices - leading to a narrower goods trade deficit compared to the previous fiscal year.

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“We think a larger boost to the current account balance will come from a robust services trade surplus. We thus expect the current account deficit to print around $40 billion (1.1 per cent of GDP) in FY24, and increase only modestly to 1.2 per cent of GDP in FY25,” as per Bajoria’s assessment.

Aditi Gupta, Economist, Bank of Baroda, expects CAD to moderate in FY24. This will be underpinned by lower commodity prices, services exports and robust remittances receipts.

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However, growth in merchandise exports is likely to be lower as global growth slows down. Some effect on services exports too cannot be ruled out, she said.

“For FY24, we expect CAD in the range of -1.2 per cent to -1.6 per cent of GDP. Even in capital account, some improvement is expected as FDI and FPI inflows pick up. This should keep the Rupee range bound,” Gupta said.

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