India has Current Account Surplus in Q4; FY24 CAD at 0.7% of GDP

25 Jun 2024 , 12:51 PM

INDIA BOUNCES TO CURRENT ACCOUNT SURPLUS IN Q4FY24

The fourth quarter current account deficit (CAD) for FY24 bounced into a small surplus of $5.7 Billion or 0.6% of the GDP. The last time India reported a current account surplus was in the June 2021 quarter. In the last 5 years, there were 3 current account surplus quarters; and all three came amidst the COVID crisis, when imports had fallen sharply. The current account surplus in Q4FY24 is special as it is the first time in the last 20 years that India is reporting a current account surplus in normal macroeconomic times. In addition, the third quarter current account deficit (CAD) of $10.5 Billion was also revised lower to $8.7 Billion; giving further respite to the full year current account deficit. RBI reports the CAD with a lag of one quarter i.e., the March quarter CAD just got reported towards the end of June and this cycle goes on. Current account deficit is a combination of merchandise trade deficit adjusted for services account surplus, interest payments towards dividend / interest as well as remittances coming into India. These four items combine to create the current account deficit; three out of the four have been positive for India in Q4FY24.

Let us now look at some yoy comparisons. For the March 2024 quarter (Q4FY24), the current account surplus (CAS) was reported at $5.7 Billion, which marks a sharp turnaround compared to a deficit of $1.50 Billion in the year ago period and a revised deficit of $8.70 Billion in the sequential third quarter of FY24. The fourth quarter saw multiple benefits flowing in. Firstly, the merchandise trade deficit (trade in goods) narrowed on a yoy basis, while the services surplus was higher on a yoy basis in Q4. Interestingly, the secondary income from remittances from Indians abroad was also sharply higher as the positive tidings from the India growth story appear to be helping. Let us now turn to the CAD story.

CAD STORY OVER LAST 12 QUARTERS

The table captures the current account balance trend for the last 12 sequential quarters.

Quarter	Current Account Balance
Quarter Ended June 2021	$6.58 Billion
Quarter Ended September 2021	$(9.71) Billion
Quarter Ended December 2021	$(22.16) Billion
Quarter Ended March 2022	$(13.40) Billion
Quarter Ended June 2022	$(18.00) Billion
Quarter Ended September 2022	$(30.90) Billion
Quarter Ended December 2022	$(16.80) Billion
Quarter Ended March 2023	$(1.30) Billion
Quarter Ended June 2023	$(9.20) Billion
Quarter Ended September 2023	$(8.30) Billion
Quarter Ended December 2023 #	$(8.70) Billion
Quarter Ended March 2024	$5.70 Billion

Data Source: RBI (# CAD Revised lower from $10.5 bn to $8.70 bn)

Here are some of the major takeaways from the time series data on current account deficit for the last 12 quarters.

• India has reported a current account surplus of $5.70 Billion in Q4FY24, the first current account surplus since the June 2021 quarter. The last 3 current account surplus came during the pandemic, so effectively, this is the first current account surplus in the last 18 years.
• The restrained CAD in the last 3 quarters can be largely attributed to factors like Russian oil imports, fall in global commodity prices and a surge in the service surplus. The “Atma Nirbhar Bharat” strategy of import substitution has also been effective in curbing imports. However, gold imports which had normalized in the last few quarters, appears to have picked up along with silver imports; from the UAE CEPA route.
• The reduced CAD of $8.7 Billion for the December 2023 quarter, is just 1.0% of GDP. This is lower than the current account deficit reported in the year-ago quarter. However, this lower revision has been instrumental in compressing the current account deficit for the full year FY24, which fell to just $23.2 Billion or 0.7% of GDP. This was largely helped by the downward revision of December quarter CAD and surplus in March 2024 quarter.
• What helped reverse the current account deficit to a surplus in March 2024 quarter? On yoy basis, the POL deficit was actually tad higher due to the advantage of deep Russian discounts waning. However, the merchandise trade account deficit still narrowed, while the services surplus increased. More importantly, the secondary income as represented by the remittances from abroad, showed a sharp bounce in the fourth quarter.

Overall, it was a mix of factors that helped the current account turn around to surplus in Q4.

HOW CAD BASKET SHIFTED YOY IN MARCH 2024 QUARTER?

Here we look at the break-up of the current account surplus for the March 2024 quarter and how it shifted on a yoy basis compared to the year-ago fourth quarter.

Pressure on Current Account	Q4 FY24 Break-up	Q4 FY23 Break-up	Boost to Current Account	Q4 FY24 Break-up	Q4 FY23 Break-up
Trade Deficit	($50.90 bn)	($52.60 bn)	Services Surplus	+$42.70 bn	+$39.10 bn
Primary A/C – Interest	($14.80 bn)	($12.60 bn)	Secondary Income	+$28.70 bn	+$24.80 bn
Negative Thrust on CA	(-$65.70 bn)	(-$65.20 bn)	Positive Thrust on CA	+$71.40 bn	+$63.90 bn
		Current Account Surplus / (Deficit)		+$5.70 bn	(-$1.30 bn)

Data Source: RBI

The current account, on a yoy basis, turned around from a deficit of $-1.30 Billion in Q4FY23 to a surplus of $5.70 Billion in Q4FY24. Here is what triggered this turnaround.

• Firstly, the merchandise trade deficit was lower at $(50.90) Billion in the March 2024 quarter. This compares with $(52.60) Billion in the year-ago quarter. This is largely on account of the lower average crude prices, although the benefits of the Russian crude discounts appear to be waning now. Between, the sequential quarter, the Red Sea crisis has had an impact on the volumes of trade, although that has hit the exports as well as the imports of merchandise goods in the quarter. The net effect was only marginal.
• One major risks that is hitting trade is the strife in the Middle East and West Asia. Most of the large shipping lines are avoiding the Red Sea route and taking the much longer Horn of Africa route. Now, that is not only adding to delivery times, but also resulting in higher cost of transport, higher fuel costs, and higher insurance and interest costs for the intervening period. With Israel persisting with its war in the Gaza region, there appears to be no early solution to this problem.
• Needless to say, the big story in March 2024 quarter (Q4FY24) quarter was the growth in services surplus to $42.70 Billion compared to $39.10 Billion in the year ago period. While the slowdown has had some impact on the services space, it has been largely neutralized by the focus on AI and new technologies apart from niche areas like global capability centres, data centres etc. In most months, the services surplus has managed to substantially offset the impact of merchandise trade deficit.
• Primary outflows on account of payments on investments in the form of interest and dividends increased yoy from $12.60 Billion in Q4FY23 to $14.80 Billion in Q4FY24. This is on account of higher pay-outs on in-bound investments amidst rising inflows from FDI and FPI flows. However, on the positive side, the secondary income reflected by the remittances from abroad into India has risen in the quarter to $28.70 Billion compared to $24.80 Billion in the year-ago quarter. Clearly, it looks like expat Indians are making a big bet on the India growth story.

Overall, the trends from the current account story appear to be encouraging for the March 2024 quarter. The full year current account deficit for FY24 is sharply down to $23.20 Billion as compared to the FY23 full year CAD of $67.00 Billion. When the fiscal year was over, the hope was that India would be lucky to achieve CAD of around 1% of GDP. However, thanks to the revised CAD in Q3 and the current account surplus in Q4, the full year current account deficit has come in at just $23.2 Billion or around 0.7%of GDP. We will now look at the FY24 story in granular detail.

HOW THE FULL-YEAR CAD FOR FY24 COMPARES WITH FY23?

While we saw the Q4 comparison, the end of FY24 is also an opportunity to compare the full year fiscal deficit data for the last two fiscal years. Here is what we can infer.

Pressure on Current Account	Fiscal FY24 Break-up	Fiscal FY23 Break-up	Boost to Current Account	Fiscal FY24 Break-up	Fiscal FY23 Break-up
Trade Deficit	($242.1 bn)	($265.3bn)	Services Surplus	+$162.8 bn	+$143.3 bn
Primary A/C – Interest	($49.8 bn)	($45.9 bn)	Secondary Income	+$105.9 bn	+$100.9 bn
Negative Thrust on CA	(-$291.9 bn)	(-$311.2 bn)	Positive Thrust on CA	+$268.7 bn	+$244.2 bn
		Current Account Surplus / (Deficit)		+$23.2 bn	(-$67.0 bn)

Data Source: RBI

With the data available for the full fiscal year FY24, here is a comparison of the current account basket for FY24 vis-à-vis the basket for the previous fiscal year of FY23.

• For full fiscal year FY24, the merchandise trade deficit narrowed yoy to $242.1 Billion compared to $265.3 Billion in FY23. This can be attributed to the discount on Russian oil imports, as Russia had emerged as the largest contributor to the Indian oil basket. The fall in merchandise trade deficit was also partially on account of lower commodity prices and weak import numbers. The Red Sea crisis also had its stamp on the merchandise trade volumes overall, which helped lower the trade deficit too.
• What is more interesting is that the POL (petroleum, oil, lubricants) deficit accounted for 39.45% of the merchandise trade deficit in FY24. In contrast, the POL deficit accounted for 42.18% of the merchandise trade deficit in FY23. This also means that while the oil-driven deficit has fallen, the gains are narrowing. The overall trade pressures due to the ongoing Red Sea crisis have been instrumental in reducing the overall merchandise trade deficit as well as the POL deficit.
• The more interesting story in FY24 was the growth in services surplus. The service surplus for FY24 stood at $162.8 Billion compared to just $143.3 Billion in the year-ago period of FY23. This is despite the fact that the services surplus also had a small setback on account of the weak tech demand from the US amidst cuts in expenditure. That appears to have been offset by other service outsourcing like the global competency centres (GCC), audit, legal, accounting services etc.
• Primary outflows on account of payments on investments in the form of interest and dividends increased to $49.8 Billion in FY24 as compared to $45.9 Billion in FY23. This is on account of higher payouts on in-bound investments amidst rising inflows from FDI and FPI flows. That may actually be positive. There was some good news on the secondary income represented by remittances from abroad. The secondary income has increased to $105.9 Billion in FY24 compared to $100.9 Billion in FY23.

The current account surplus in Q4FY24 and the downward revision of the current account deficit in Q3 have helped India close FY24 with overall current account deficit of just $23.2 Billion. That is roughly 0.7% of GDP and is important as it shows a sharp improvement in the current account situation. More importantly, this is after almost 20 years that India is reporting a surplus on the current account in normal times (excluding the pandemic period).

KEY TAKEAWAYS FROM A SHARPLY LOWER CAD IN FY24

Ironically, this 0.7% current account deficit as a share of GDP comes in a year when October 2023 had seen the highest-ever merchandise trade deficit at $31.5 Billion. The government has adopted a number of measures like export push, import substitution, Russian oil procurement etc to bring down the CAD on a war footing. India has already emerged as a preferred iPhone manufacturer for Apple Inc and that could just be the beginning of the plethora of opportunities that this will open up for India. Despite a strong CAD position, the Indian rupee continues to weaken, purely because the dollar continues to strengthen against the Euro, Pound, and Yen. Will this strong CAD position, impel the RBI to cut rates on a pre-emptive basis? That would be a different discussion altogether.