The Finance Ministry’s annual review of the economy in FY23 as well as the Reserve Bank of India’s recent assessment of the balance of payments point to a sanguine turn of events since the second half of FY22. The former says that “the continued decline in global energy prices and sustained performance of services exports may further narrow CAD in FY24”(2 per cent of GDP in FY23). While these are early days, the changing nature of services exports since the pandemic suggests that the buoyancy is here to stay. If this is so, India can perhaps manage a higher goods trade deficit to drive growth; net quarterly services exports have risen from $25 billion to $40 billion over three years by the end of FY23. At $323 billion (gross), services exports accounted for 72 per cent of goods exports in FY23, a share that has been rising.

However, the CAD is a sum of many moving parts (exports of goods and services; import trends; and capital flows), and it remains to be seen how these play out in the current fiscal. Merchandise exports are set for a subdued year in FY24. According to the review, global trade growth in 2023 is likely to be 1.7 per cent, against 2.7 per cent in 2022, with monetary tightening depressing demand. It is notable that petroleum exports were buoyant partly due to export of refined products to Western markets from cheap Russian crude supplies. At over $20 billion in each of the four quarters of FY23, it made up about a fifth of total exports. This may not sustain if Russian crude prices edge up. In fact, petroleum products exports were down 24 per cent in March. While export diversification has taken place with respect to electronics, medical instruments, agriculture, leather products and transport equipment, these are price-elastic products. India needs to develop differentiated products.

Quarterly services exports have risen 60 per cent from pre-Pandemic levels or from about $50 billion to $80 billion (gross figures). A structural shift might have taken place since then, with Global Capability Centres providing “back-end support to MNCs” (the review). If the CAD falls on the strength of services exports, the RBI would have something to cheer about – especially if the Fed stops raising rates and roiling capital flows. Monetary policy can then focus on domestic economy concerns in the absence of exchange rate volatility. A lower CAD means that it need not worry too much over the currency effects of poor FDI and FPI flows. That said, goods exports have always been fickle.

A low CAD arising out of subdued imports cannot at all be a good sign for a low-middle income country such as India. Fortunately, non-oil and non-jewellery imports were up 17 per cent last fiscal, indicating that the economy is picking up. But this must be closely monitored for cues; for example, its growth was negative in March. A low CAD per se is no virtue in a country with low per capita income.