High net exports signal rising pressure on India's current account deficit

Geopolitical risks, hardening commodity prices may push it up more: Experts

India’s current account deficit (CAD) is set to widen in Q3 with net exports ratio touching the highest level in three years — at -3.9 per cent of gross domestic product (GDP) in the October-December quarter of FY22, GDP data has shown. 

Experts believe growing geo-political risks and hardening commodity prices could further widen CAD in the near term.

Net exports is considered a proxy for CAD. While net exports in the GDP data captures the difference between imports and exports of both goods and services, CAD data, released by the Reserve Bank of India (RBI), also factors in private transfer receipts. This mainly represents remittances by Indians employed overseas, along with net exports.

India’s CAD stood at 1.3 per cent of GDP in the September quarter compared to a current account surplus of 0.9 per cent of GDP in the June quarter of FY22. Data for the third quarter is due by end-March.

Vivek Kumar, an economist at research firm QuantEco, said based on information in the GDP data and his estimates for invisibles, he sees India’s CAD widen to 2.9 per cent of GDP in Q3 from 1.3 per cent in Q2. 

“For FY22 as a whole, the current account is expected to close at a deficit of 1.6 per cent of GDP vis-à-vis a surplus of 0.9 per cent in FY21,” he added.

Kumar said with global commodity prices escalating, especially on account of the ongoing attack by Russia on Ukraine, pressure on India’s CAD could persist if geopolitical resolution takes time to come by. 

“In this scenario, India’s current account deficit can potentially widen further towards 2.6 per cent of GDP in FY23 at current level of oil prices,” he said.

RBI governor Shaktikanta Das, in his monetary policy statement last month, had said India’s external sector sustainability is anchored by high foreign exchange reserves and a modest level of CAD. 

“In H1 (April to September) of 2021-22, CAD was 0.2 per cent of GDP, underpinned by robust exports of goods and services. The merchandise trade deficit has widened in recent months partly due to elevated crude oil prices and rise in non-oil imports in line with the domestic economic recovery. Buoyant services exports, led by IT services with strong prospects going forward, are likely to keep the CAD contained well below 2 per cent of GDP during 2021-22. Moreover, foreign direct investment (FDI) inflows remain strong, which along with other forms of capital inflows, are expected to comfortably finance this modest level of CAD,” he added.

During the December quarter, while merchandise exports hit a record $103 billion, merchandise imports also shot up to $168 billion, leading to a trade deficit of $65 billion. 

India Ratings and Research, in a report released on Tuesday, stated that geopolitical risks would push the import bill higher for items such as mineral fuels & oils, gems & jewellery, edible oils and fertilisers as India has significant import dependence on these items. 

“As a result, merchandise imports may cross $600 billion in FY22. 

The immediate impact of the conflict on the Indian economy will be felt through inflation, an increase in CAD and rupee depreciation. An increase of $5 per barrel in crude oil prices will translate into a $6.6 billion increase in CAD,” it added.

Fitch Ratings, last week, said India is in a better position to manage these external risks, particularly relative to the 2013 “taper tantrum”, due to its narrower CAD and higher foreign-exchange reserves compared with the earlier period. 

India was flagged as a member of the “fragile-five” by investors during the 2013 spike in US Treasury yields after the Fed announced tapering of its asset purchases.

“Our forecast of a modest CAD of 1.3 per cent of GDP in FY22, after a temporary surplus of 0.9 per cent in FY21, is well below the deficits of over 4 per cent of GDP in the run-up to the taper tantrum. This signals that India’s external vulnerabilities have diminished. Robust exports have helped to offset pressure from rising oil imports. We expect the CAD to continue to widen slightly but remain contained at close to 2 per cent over the next few years,” it added.