India’s Jan-March current account deficit dips to a 7-quarter low, but still disappoints a tad

India’s current account deficit for Jan-March 2023 quarter (i.e. for Q4 FY23) has come in at just 1.3 billion dollars or 0.2 percent of GDP. This is the lowest since Q1 of FY22. But the number was a tad disappointing because economists were expecting the country to post a minor current account surplus of 5-6 billion dollars or 0.5 percent of GDP.

What caused this minor disappointment was a lower-than-expected services exports surplus. Monthly data released by the commerce ministry for January, February and March 2023 had indicated a services exports surplus of $44.7 billion but the RBI’s data today showed that the services surplus was a tad lower at $41 billion. Monthly data releases are quick and dirty numbers and do get revised when the RBI finally presents the numbers a quarter later.

Given the higher than expected Q4 current account deficit, the full year current account deficit (CAD) has also come in slightly higher than expected at 2 percent of GDP or $67 billion. Economists were estimating a full year CAD of $60 billion or 1.8 percent of GDP.

The disappointment today should not be over-blown. Earlier in FY23, around May-June 2022, when crude prices were ruling over $100 per barrel, economists were expecting India to post a FY23 current account deficit of  3-3.4 percent. Even the RBI, while dousing these fears, had said in one of its monthly reports that it expects FY23 CAD at around 2.8 percent of GDP. Given these fears earlier the 2 percent CAD is welcome.

Two important achievements have enabled this lower CAD:

1) First (as mentioned earlier) is the steaming growth in India’s non-software services exports. While software exports have grown 20 percent from $109 billion in FY22 to $131 billion, non-software services (called business services in the RBI release) have trebled from $7.29 billion in FY22 to $20.6 bn in FY23.

2) The other big prop to lowering the CAD is the rising inflows from Indians living abroad and remitting money to their families at home. Private transfers, as the RBI calls them, have shot up 20 percent from $81.2 billion in FY22 to $101.7 billion in FY23.

The other trend helping reduce India’s CAD has been the fall in crude oil prices. Hence the goods (or merchandise) trade deficit too in Q4 has come in at a modest $52.6 billion – lowest in 6 quarters.

On the other hand, payments made by Indian companies to overseas parties by way of interest, dividend and royalties has shot up from $40 bln in FY22 to $49 billion in FY23, an 18 percent jump.

Coming to the capital account, one disappointment is the fall in foreign direct investment in Q4 FY23 to $6.3 billion from $13.8 billion year ago, possibly due to the fall in PE and VC funding for start-ups.

For similar reasons, FDI for the full year FY23 is also down from $38.6 billion in FY22 to $28 billion. Net-net for the full year the country saw a depletion of $9.1 billion of forex reserves, against an increase of $47 billion last year.

For FY24, economists are confident of continued buoyancy in India’s services exports and moderation in crude prices. The current account deficit for FY24 is expected to fall to 1.2 percent of GDP, as per economists polled by CNBC-TV18.