India's goods trade deficit for May 2023 at $22.12 billion is the highest in past five months . But along with a goods trade deficit, another worry has been the slowing demand for Indian services in global markets. India's services exports cooled off in May 2023 to multi months low at $25.3 billion. This raises a question on whether India's much-touted services exports are stagnating and hence, will current account deficit re-emerge as a worry.
The services exports are slowly catching up with weaker goods exports, with their growth falling to 0.7 percent year on year in May from 7.4 percent in April and 26.7 percent in FY23. Nomura says the ongoing moderation reflects cutbacks in discretionary tech spending by Western firms in the banking, financial services, insurance and retail verticals.
On similar lines, Morgan Stanley in a report released in May 2023, flagged potential risks in the cyclical drivers of global growth and challenges related to infrastructure development and talent supply. It has also warned that automation from software bots could pose a risk to highly commoditized work within BPO and other services. Though Nomura assures that the slowdown is likely cyclical, and the structural drivers of India’s services exports remain intact.
However, it is noteworthy that India's share in global services exports is at an all-time high of near 5 percent. The reason for this being the rise in software and business services, along with the emergence of Global Capability Centres (GCCs) set up by multinational firms in India.
Why is slowing services exports a concern for the Indian economy?
A slowdown in services exports could weaken urban consumption, as the IT sector is an important generator of employment. However, the balance of payments impact should be manageable, as services imports will also likely
slow. Nomura expects the services trade surplus to rise by 4 percent year on year in FY24 after gaining 32.8 percent in FY23, but the current account deficit to still narrow to 1.4 percent of GDP from ~1.8 percent in FY23.
Is India's trade deficit worrisome?
India’s trade performance, after witnessing strong growth in FY23 has shown declining trends in FY24. But there is also a high base playing a role here. Furthermore, the persisting geopolitical tensions and monetary tightening induced recessionary fears have led to a decline in consumer spending across advanced nations.
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