8 mins read . 17 Aug 2023
Current account deficit (CAD) is one of the most important measures of the health of the economy. India has perpetually run a current account deficit, largely because its merchandise imports have always been substantially higher than its merchandise exports. The good news is that India has a surplus on the services trade account, but that is not large enough to fully offset the deficit in the merchandise trade account. As a result, the merchant trade deficit becomes a big driver of the current account deficit. The CAD is a more expanded form of the trade deficit in that it also considered other international income inflows and outflows. The net figure is the current account deficit.
Last year in FY23, the apprehensions were that the current account deficit (CAD) would scale above 4% of GDP. That was slightly worrying scenario since it would have resulted in a weakening of the rupee as well as a possible rating downgrade. Fortunately, it turned out better. In comparison, FY24 promises to have a CAD of around $75 billion or nearly 2.0%-2.2% of GDP. That is still high in absolute terms, if you look at the peer group nations, but it is a lot more manageable for India. But how will the situation improve in FY24 on the CAD front? To understand that, we need to look at the July trade and also the FY24 trade cumulatively.
In the US, the trade data is always presented on a consolidated basis, including merchandise goods and services. However, in India, the data on merchandise goods and services are presented separately. The Directorate General of Foreign Trade (DGFT) presents the merchandise trade data in the middle of each month (pertaining to the previous month). However, the services trade data is presented by the RBI with a lag of one month. Hence, the DGFT not only factors in the actual services trade data of the RBI, but also uses proprietary models to project the likely services trade surplus / deficit for the latest month so that the merchandise trade data and the services trade data become comparable. With the growing importance of services in the overall GDP and the rising global demand for services from India, it must be noted that the services segment is becoming the focus of government policy to boost exports. The table below captures the gist of the overall trade for July 2023, including services, with comparison of July 2022, the year-ago period.
Macro Variables (Jul-23) | Jul-23 ($ bn) | Jul-22 ($ bn) | Change YOY |
Merchandise Exports | 32.25 | 38.34 | -15.88% |
Merchandise Imports | 52.92 | 63.77 | -17.01% |
Total Merchandise Trade | 85.17 | 102.11 | -16.59% |
Merchandise Trade Deficit | -20.67 | -25.43 | -18.72% |
Services Exports | 27.17 | 24.26 | 12.00% |
Services Imports | 14.85 | 14.06 | 5.62% |
Total Services Trade | 42.02 | 38.32 | 9.66% |
Services Trade Surplus | 12.32 | 10.20 | 20.78% |
Combined Exports | 59.42 | 62.60 | -5.08% |
Combined Imports | 67.77 | 77.83 | -12.93% |
Overall Trade Volume | 127.19 | 140.43 | -9.43% |
Overall Trade Deficit | -8.35 | -15.23 | -45.17% |
Data Source: DGFT
What is it that we can gather from the tabular analysis above?
In April 2023, the services trade surplus managed to fully offset the merchandise trade deficit. However, weak service exports have had an impact. To get a picture on the CAD, let us turn to the cumulative picture of the first 4 months of FY24.
The previous table gives a narrow picture of just one month. However, to get guidance on full-year CAD, a cumulative picture has been captured in the table below. All data here is for FY24 (4 months) compared to FY23 (4 months) for the April-July period.
Macro Variables (FY24) | FY24 ($ bn) | FY23 ($ bn) | Change YOY |
Merchandise Exports | 136.22 | 159.32 | -14.50% |
Merchandise Imports | 213.20 | 247.31 | -13.79% |
Total Merchandise Trade | 349.42 | 406.63 | -14.07% |
Merchandise Trade Deficit | -76.98 | -87.99 | -12.51% |
Services Exports | 107.93 | 100.35 | 7.55% |
Services Imports | 59.21 | 59.09 | 0.20% |
Total Services Trade | 167.14 | 159.44 | 4.83% |
Services Trade Surplus | 48.72 | 41.26 | 18.08% |
Combined Exports | 244.15 | 259.67 | -5.98% |
Combined Imports | 272.41 | 306.40 | -11.09% |
Overall Trade Volume | 516.56 | 566.07 | -8.75% |
Overall Trade Deficit | -28.26 | -46.73 | -39.52% |
Data Source: DGFT (FY24 and FY23 refer to April-July)
For the first 4 months of FY24, merchandise trade deficit stands at $76.98 billion, offset by services trade surplus of $48.72 billion, resulting in an overall trade deficit of just $28.26 billion for FY24. That is about 40% lower than last year, which is the good news. Now, what does that mean for the current account deficit (CAD) guidance for FY24?
If this trend is maintained or marginally improved upon, India can end FY24 with current account deficit (CAD) at around $70-75 billion; less than 2% of GDP. The current account deficit is high in absolute terms, but comfortable as a percentage of GDP. Tepid global commodity prices are helping. However, weak exports of goods and services remain an area of concern. The hope is that the situation does not worsen from here.
Mutual Fund
6 mins read . 13 Nov 2023
Avoid the pitfalls: why buying low NAV funds is not a strategy
Read moreDemat Account
9 mins read . 10 Nov 2023
Muhurat Trading 2023: A Guide to Auspicious Stock Market Beginnings
Read moreMutual Fund
13 mins read . 06 Nov 2023
Debt and Hybrid Funds performance for October 2023
Read moreShare Market