How services trade saved the CAD?

  • 05 Jun 2024
  • Read 7 mins read

Services trade does the trick

The one thing that FY23 will be best remembered for is the emergence of services trade as a true offsetting impact on the trade deficit. India has traditionally run a deficit in the merchandise trade account but a surplus in the services trade account. These services are largely accounted for by software / IT / ITES exports as well as the provision and outsourcing of business services to other countries. But that is not the story. The big story is that the services surplus has grown so sharply that is now almost offsetting the merchandise trade deficit on a monthly basis. This has been the singular factor that has kept the current account deficit (CAD) in check for FY23. But, first, let us look at how the merchandise trade deficit panned out and then come back to the services trade surplus.


A quick look at the merchandise trade

As the name suggests, the merchandise trade represents the actual trade in physical goods like oil, minerals, manufactured goods, textiles, agricultural products etc. 

MonthExports ($ billion)Imports ($ billion)Trade Surplus / Deficit

Data Source: DGFT

One thing is evident from the table above. Merchandise trade deficit had peaked around July 2022 and has been falling ever since. For the full financial year FY23, after adjusting for delayed customs data inflows, India reported merchandise trade deficit of $266.78. There has been an overall reduction of close to $33 billion from original estimates of trade deficit based on delayed customs data inflow. In short the merchandise trade situation has become a lot more comfortable. To top it, services exports surged, as we shall see now.

How services exports have surged in FY23

The table below captures the gist of merchandise and services trade in India in FY23 in comparison to FY22.

Trade data 
Fiscal year 
FY23 ($ bn)
Fiscal year 
FY22 ($ bn)
Merchandise Exports447.46422.006.03%
Merchandise Imports714.24613.0516.51%
Total Merchandise Trade1,161.701,035.05  12.24%
Merchandise Trade Deficit266.78191.05  39.64%
Services Exports322.72254.5326.79%
Services Imports177.94147.0121.04%
Total Services Trade500.66401.5424.68%
Services Trade Surplus144.78107.5234.65%
Overall Exports770.18676.5313.84%
Overall Imports892.18760.0617.38%
Overall Total Trade1,662.361,436.5915.72%
Overall Trade Deficit122.0083.5346.06%

Data Source: DGFT

The table above is a clear encapsulation of how the services trade has captured a place of macro importance for India in FY23. Consider these numbers.

  • The total overall trade (goods plus services ) for FY23 was 15.7% higher at $1.66 trillion. However, while the overall merchandise trade went up by 12.24%, it was the overall services trade that went up by 24.68% in FY23.

  • Let us look at the contribution of services exports in FY23. For the full year, services exports grew by 26.8% yoy to $322.72 billion. This ensured that the services trade surplus went up sharply by 34.65% to $144.78 billion. 

  • This services trade constitutes all the forex flows from non-physical outflow of services. This includes IT exports which is still more than 60% of the overall services exports. However, in the last one year, several other business and mercantile services built up.

What is the moral of the services story here? In a sense, FY23 has been the story of the growth in services exports. It has not only grown rapidly, but has also been the saviour for the trade account and also for the current account, which we will see later. More important is the contribution of the services surplus to the overall deficit. In FY23, the services trade surplus stood at $144.78, which is 34.7% higher than the services trade surplus in FY22. If the overall trade deficit for the fiscal year FY23 has been curtailed at just about $122 billion, the credit goes to services exports. It literally saved the day for the India trade story.

Current Account deficit is under better control

In the September 2022 quarter, India reported a record quarterly current account deficit of $36 billion. That had raised the spectre of overall CAD going well beyond 4% of GDP, which is not a very comforting scenario. However, two things have now changed in India’s favour. Firstly, the merchandise trade deficit for FY23 originally pegged at $300 billion, came in sharply lower at $266.78 billion. That is better than the elevated levels envisaged 4-5 months back. The second factor was the surge in services exports, which has helped to curtail the overall deficit and hence the current account deficit (CAD).

ParticularsExports FY23 ($ bn)Imports FY23 ($ bn)Surplus / Deficit ($ bn)
Merchandise trade$447.46 bn$714.24 bn$(-266.78) bn
Services Trade #$ 322.72 bn$177.94 bn$+144.78 bn
Overall Trade$770.18 bn$892.18 bn$(-122.00) bn

Data Source: DGFT 

Overall trade deficit, which is a combination of merchandise trade deficit and services trade surplus, was originally pegged closer to $160 billion but has now come in at a more palatable level of $122 billion. For the time being it is less of a challenge for CAD; and for that one must really thank the way the services exports panned out in the second half of the year. India may still end up with CAD of around 3% to 3.3% of GDP. That is high in absolute terms but not as bad as the 4.5% CAD envisaged earlier. The big driving factor, apart from weaker global commodity prices, was the surge in services exports. Clearly, Indian trade has focused on where it is best equipped.