India’s current account deficit widens to $9.2 billion in June quarter

India's current account deficit (CAD) widened to $9.2 billion during the June quarter (Q1 FY24), from $1.3 billion in the previous quarter (Q4 FY23) owing to a higher trade deficit, lower surplus in net services, and a drop in private transfer receipts, the Reserve Bank of India (RBI) said on Thursday.

A trade deficit, the largest component of the current account deficit (CAD), occurs when the value of the goods and services a country imports exceeds that of its exports.

The widening of the trade deficit comes amid a sharp decline in merchandise exports owing to slowing demand in Western countries and China. Services exports have been on the rise, growing 22.8% in January-March 2023, but experts are concerned about a slowdown in demand for software and banking services globally.

To be sure, India is largely a net importer on account of its huge energy imports. Moreover, gold imports have also jumped. Gold imports rose by 38.75% to $4.93 billion in August, and 10.48% to $18.13 billion during April-August 2023.

"The improvement in CAD (on an annual basis) was mainly due to a lower trade deficit of $56.6 billion as against $ 63 billion last year," said Madan Sabnavis, chief economist at Bank of Baroda. "This improvement was mainly due to the decline in commodity prices globally this financial year," he added.

However, the recent increase in crude oil prices (prices have been above $90 a barrel in September and are approaching $100) is likely to further widen the CAD.

Exporters said manufacturing across the euro zone and the US has also contracted due to persistent policy tightening by both the US Fed and the European Central Bank. As Asian economies are showing mixed performance, countries across the continent have struggled to maintain momentum.

Amid slowing demand, the union commerce ministry recently extended support under the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme until 30 June 2024.The scheme provides a mechanism for reimbursement of taxes, duties and levies that are currently not being refunded at the central, state or local level.

"India’s current account deficit (CAD) widened to $9.2 billion (-1.1% of GDP) in Q1 FY2024 from $1.3 billion in Q4 FY 2023 (-0.2% of GDP), but trailed our forecast led by a healthier than anticipated merchandise trade balance, even as the services trade surplus and balance of secondary income were smaller than anticipated,” said Aditi Nayar, chief economist and head of research and outreach at ICRA Ltd.

Nyar added that with the average merchandise trade deficit trending higher in July-Aug 2023 than in Q1 FY24, and the recent rise in crude oil prices, ICRA estimates CAD will widen sequentially to $19-21 billion (-2.3% of GDP) in Q2 FY24.

Overall, ICRA projects the CAD will widen to $73-75 billion (-2.1% of GDP) in FY24 from $67.0 billion (-2.0% of GDP) in FY23, building in an average crude oil price of $90 a barrel in the second half of FY24, Nayar added.