Current Account Deficit Set To Narrow As Exports And Imports Fall

With the merchandise trade deficit set to remain narrow, economists trim forecasts for the current account deficit.

India’s current account deficit declined to $18.2 billion (2.2% of GDP) as of December from $30.9 billion (3.7% of GDP) three months prior and $22.2 billion (2.7% of GDP) a year earlier, according to the last published data by the Reserve Bank of India. Underlying the lower current account deficit in Q3 was a narrowing of the merchandise trade deficit to $72.7 billion from $78.3 billion in Q2.

In April, the merchandise trade deficit fell to a 20-month low of $15.2 billion from $18.4 billion a year ago. Merchandise exports fell 12.7% year-on-year to $34.66 billion in April 2023, while imports fell 14.1% year-on-year to $49.9 billion.

"Looking at January–April 2023, our monthly tracking estimate shows that all four months printed a small current account surplus, underscoring the rapid improvement in the financing gap India faces," Rahul Bajoria, chief economist at Barclays, said.

Barclays is currently tracking the current account surplus at $3.5 billion (0.4% of GDP) in Q4FY23, compared to a deficit of $18.2 billion (2.2% of GDP) in Q3FY23.

A slowing global economy implies commodity prices will trend lower on average compared with the previous year, Bajoria said. As such, the goods deficit is expected to decline this fiscal year as import values fall much more than export values, both weighed down by weak external demand and, to a lesser extent, moderation in domestic demand.

With services exports expected to remain robust, supporting the current account, the current account deficit for FY24 is projected to be $50 billion (1.4% of GDP), compared to a deficit of $70 billion (2.1% of GDP) in FY23, with risks tilted towards a smaller annual deficit for both fiscal years, Bajoria said.

Acuite Ratings forecasts the current account deficit for FY24 to narrow to $53 billion (1.4% of GDP), with comfort on the monthly trade deficit prints set to continue despite the persistence of adverse global geopolitics, given the normalisation of supply chains, correction in global commodity prices including crude oil, and slowdown in domestic growth weighing on core imports.

Russia’s share in India’s import basket has steadily climbed from 2.1% in January 2022 to 9.2% in March 2023. Since most of this is on account of crude oil, which is procured at a discount of $25–30 per barrel compared to Brent, this is increasingly becoming an important source of savings for India’s merchandise trade deficit, Acuite Ratings noted.

Core imports reflect the slowdown in domestic growth as pent-up demand for goods wanes. Core imports contracted 12.5% year-on-year in April, marking the first contraction in 30 months, according to Acuite Ratings. With GDP expected to moderate to 6.0% in FY24 from an estimated 7.0% in FY23, core imports could remain somewhat on a slower track, it added.

At $108 billion, India was one of the highest recipients of secondary income inflows in the world in the calendar year 2022, according to a note by Goldman Sachs. As a percent of GDP, secondary income receipts stood at 3.2% of GDP in CY22, which was the second highest among emerging market peers, it said.

Secondary income inflows have been an important component of India’s current account, accounting for about 14% of the current account receipts in the last 5 years. "We expect remittances to remain strong in CY2023 and forecast remittances at $104 billion in CY2023," Goldman Sachs stated. It also revised its forecasts for services exports higher to $350 billion, taking the overall services trade surplus to $152 billion.

Given the tailwinds from higher remittance inflows, a higher services trade surplus, and a lower goods trade deficit, Goldman Sachs forecasts the current account deficit at $50 billion (1.4% of the GDP) for the calendar year 2023.