After 13-quarter high in Q3, current account deficit may have eased in Q4

Net exports, which are considered a proxy for current account deficit, declined 2.9% of the GDP in the March quarter

India’s current account deficit (CAD) is expected to have eased in the January-March quarter of FY22 after touching a 13-quarter high in October-December 2021.

Net exports, which are considered a proxy for CAD, declined 2.9 per cent of the GDP in the March quarter as compared to a 3.9 per cent decline in the December quarter, according to the GDP data released on Tuesday.

India’s net exports are always negative as imports outpace exports. “On an average, net exports drag down India’s GDP growth by 3 percentage points. In FY22, however, it reduced GDP growth by 5 percentage points. But for net exports, India could have recorded double-digit GDP growth in FY22,” said a research report by Anand Rathi.  

While net exports in the GDP data captures the difference between imports and exports of both goods and services, CAD data released by the Reserve Bank of India (RBI) also factors in private transfer receipts. This mainly represents remittances by Indians employed overseas, along with net exports.

India’s CAD stood at 2.7 per cent of the GDP in the December quarter compared to 1.3 per cent in the September quarter.

“The drag from net exports ratio moderated in Q4. This could, in turn, reflect some narrowing of the current account deficit towards 1.9 per cent of GDP in Q4 of FY22 from 2.7 per cent in Q3. This is in line with the favourable Q4 seasonality in monthly merchandise trade deficit numbers and the recent improvement in services trade surplus. Going forward, we expect CAD to widen towards $85 billion in FY23, with upside risk,” said Vivek Kumar, an economist at QuantEco.

India’s external sector continues to face risks from global factors such as Russia-Ukraine war, rising commodity prices and differential pace of monetary policy normalisation amid persistence of high level of inflation globally.

Additionally, supply disruptions emanating from China’s Covid situation and resultant restrictions will be weighing on prices and growth in the global economy.

In his off-cycle policy statement last month, RBI governor Shaktikanta Das said India’s external sector has remained resilient amid formidable global headwinds. “Strong revenue guidance by major information technology (IT) companies also bodes well for the overall external sector outlook in 2022-23. The worsening of terms of trade, driven by higher commodity prices, could have implications for the current account deficit in 2022-23. However, it is expected to be comfortably financed,” he added.

Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said the external sector balance is expected to be skewed towards the negative in FY23. 

“The trade deficit will likely remain wide at $230-250 billion in FY23 compared to $193 billion in FY22, as weak global demand will weigh on exports while elevated commodity prices keep imports elevated. We expect CAD of around $105 billion in FY23 (3 per cent of GDP) if crude prices were to average around $105 a barrel in FY23. We hope that geopolitical tensions will ease over the next few months, providing moderation in crude oil price trajectory in the second half of FY23,” she said.

Bhardwaj said if the risks were to persist for long, for every $10 per barrel increase in average crude price, CAD would widen by $14-15 billion (0.4 per cent of GDP).