India reports current account deficit of $9.6 Bn in Sep-21 quarter

3 Jan 2022 , 08:05 AM

If the Jun-21 quarter flattered with a current account surplus of $6.6 billion, the Sep-21 quarter disappointed with current account deficit of $9.6 billion. It is rather ironic, but India’s current account situation only improves when COVID curbs stifle imports.

India had reported record levels of current account surplus of $19.79 billion and $15.51 billion in Jun-20 and Sep-20 quarters respectively. Sep-21, in a way, is back to reality. The chart captures how the current account deficit has panned out over last 12 quarters.

Chart Source: RBI

For the Sep-21 quarter, the current account dipped to a deficit of $9.6 billion from a surplus of $6.6  billion in the Jun-21 quarter. There were 3 key reasons for the current account again dipping into deficit in Sep-21 quarter.

a) Firstly, the merchandise trade deficit has consistently widened with the figure recently touching all-time high levels as supply chain constraints have restricted export growth.

b) The second aspect is of export of services and that has seen a sharp slowdown in growth on a sequential basis, although it is still robust on a yoy basis.

c) Primary outflows on account of payments on investments in the form of interest and dividends increased sharply in the quarter, leading to a current account deficit.

Of course, trade remains the key reason. In the last few months, not only have oil imports remained at elevated levels but even gold imports were driven higher by persistent demand from jewellers in the midst of the festival season.

How the current account dipped into deficit in Sep-21 quarter

It may be recollected that India had reported current account surplus in FY21, due to the $35 billion surplus generated in Jun-20 and Sep-20 quarters. COVID 2.0 did help India revert to a current account surplus in the Jun-21 quarter. As imports picked up steam in Sep-21 quarter and exports were largely flat to lower, the current account dipped into a deficit.

Pressure on Current Account (CA)	Amount	Boosting the Current Account (CA)	Amount
Q2 Trade Deficit	($44.40 bn)	Q2 Export of Services	+$25.60 bn
Primary A/C – Interest	($9.70 bn)	Secondary Income	+$18.90 bn
Negative Thrust on CA	(-54.10 bn)	Positive Thrust on CA	+$44.50 bn
		Current Account Deficit	(-$9.60 bn)

Data Source: RBI

The dip in the current account from a surplus of $6.6 billion in Jun-21 quarter to a deficit of $9.6 billion in Sep-21 was an outcome of weak trade data. The merchandise deficit surged from $30.70 billion in Jun-21 quarter to $44.40 billion in Sep-21 quarter. Imports are showing signs of getting closer to $550 billion in FY22, but exports could remain flat. Weak growth in services exports has not helped matter.

However, there have been other pressure points too. The primary account consisting of net interest outflows has risen sharply from $7.60 billion in Jun-21 quarter to $9.70 billion in Sep-21 quarter. That contributed significantly to the pressure on the current account forcing the current account to dip from a surplus to a deficit.

How will trade pressure CAD in Dec-21 quarter?

One of the most significant influencers of the CAD is the combined deficit of merchandise trade and services trade. We have captured the data till Nov-21, i.e. 2 months after the reported Sep-21 quarter CAD. For FY22 (Apr-Nov), combined deficit of merchandise and services trade stood at $(-54.21) billion. The sharply higher merchandise trade deficit, widened the combined deficit by $14.30 billion from $(-39.91) billion in Oct-21 to $(-54.21) billion in Nov-21.

Particulars	Exports FY22 ($ bn)	Imports FY22 ($ bn)	Surplus / Deficit ($ bn)
Merchandise trade	$263.57 bn	$384.34 bn	$(-120.77) bn
Services Trade #	$155.17 bn	$88.61 bn	$+66.56 bn
Overall Trade	$418.74 bn	$472.95 bn	$(-54.21) bn

Data Source: DGFT (# – DGFT estimates due to 1-month lag in RBI reporting)

The combined deficit (merchandise + services) in first 8 months of FY22 is already 4.25 times the FY21 full year figure and could widen further in Dec-21. Based on these total trade indications, it looks like the current account deficit could only widen and deepen in the Dec-21 quarter.

Major takeaways from the current account data for Sep-21 quarter

Here are some 4 key takeaways from the current account data for Sep-21 quarter.

• The trade deficit for the Sep-21 was nearly 44.6% higher on a sequential basis as COVID 2.0 eased substantially resulting in pick-up in imports.
• However, the exports are not keeping pace as they are facing practical constraints like order flows, infrastructure bottlenecks and availability of containers.
• The primary outflows had tapered in the Jun-21 quarter but that has reversed with a sharp rise in Sep-21 quarter, adding to the CAD.
• With GDP growth being driven by trade, as evinced by the Sep-21 quarter GDP data, it is clear that the trade deficit will continue to put pressure on the current account position.

If the Jun-21 current account surplus was an outcome of the COVID 2.0 slowdown, Sep-21 quarter was more of a reality check. The only challenge is that based on total trade indications, the CAD could only deepen in the Dec-21 quarter.