At the peak of the pandemic, amidst relative import constraints; India had reported record levels of current account surplus. The current account surplus stood at $19.79 billion and $15.51 billion in Jun-20 and Sep-20 quarters respectively. The recent deterioration of the current account situation is largely on account of worsening trade deficit situation. Current account deficit as a percentage of GDP widened to 2.7% in the Dec-21 quarter. However, the CAD for Apr-Dec 2021 at 1.2% is lower than the CAD at 1.7% for Apr-Dec 2020.
Why did the current account deficit widen in Dec-21 quarter?
For the Dec-21 quarter, the current account deficit slipped deeper to $23 billion compared to current account deficit of $9.6 billion in Sep-21 and a surplus of $6.6 billion in Jun-21 quarter. There were 3 key reasons for the current account deficit widening in the Dec-21 quarter.
a) Firstly, the merchandise trade deficit widened sharply from $-34.6 billion in the Dec-20 quarter to $-60.4 billion in the Dec-21 quarter. Apart from a surge in oil and gold imports, supply chain constraints caused a spike in other imports too.
b) For the Dec-21 quarter, the services surplus improved yoy from $23.2 billion to $27.8 billion. However, this paled in comparison to the merchandise trade deficit, which almost doubled resulting in the current account deficit widening.
c) Primary outflows on account of payments on investments in the form of interest and dividends increased, albeit marginally, on a sequential basis.
Merchandise trade remains the key factor. In the last few months, not only have oil imports remained elevated, even gold imports were driven higher by persistent demand from jewellers and stockists. In addition, most other inputs also saw a surge in imports amidst stocking demand as well as a spike in the cost of inputs.
Components of the Current Account Deficit for Dec-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 and again in Dec-21 quarter, exports were flat to lower. This worsened the current account deficit.
Pressure on Current Account (CA) | Amount | Boosting the Current Account (CA) | Amount |
Q3 Trade Deficit | ($60.40 bn) | Q3 Export of Services | +$27.80 bn |
Primary A/C – Interest | ($11.70 bn) | Secondary Income | +$21.30 bn |
Negative Thrust on CA | (-72.10 bn) | Positive Thrust on CA | +$49.10 bn |
Current Account Deficit | (-$23.00 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 and further to $23 billion the Dec-21 quarter 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 and further to $60.40 billion in the Dec-21 quarter. For the full year FY22, the total exports have crossed $400 billion while total imports have crossed $600 billion. In short, the overall trade has crossed above $1 trillion in FY22, but the downside is that the trade deficit has also gone above $200 billion. That is the area of concern.
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 and further to $11.70 billion in the Dec-21 quarter. That contributed to the pressure on the current account resulting in the widening of the current account deficit. Even the services trade, despite reporting a surplus, could not compensate for the higher merchandise trade beyond a point.
Will merchandise trade pressure CAD in Mar-22 quarter?
One of the most significant influencers of the CAD is the combined deficit of merchandise and services trade. We have captured the data till Feb-22, i.e. 2 months after the reported Dec-21 quarter CAD. The sharply higher merchandise trade deficit, widened the combined deficit by $14.30 billion from $(-39.91) billion in Jan-22 to $(-54.21) billion in Feb-22.
Particulars | Exports FY22 ($ bn) | Imports FY22 ($ bn) | Surplus / Deficit ($ bn) |
Merchandise trade | $374.81 bn | $550.56 bn | $(-175.75) bn |
Services Trade # | $226.96 bn | $132.45 bn | $+94.51 bn |
Overall Trade | $601.77 bn | $693.01 bn | $(-81.24) bn |
Data Source: DGFT (# – DGFT estimates due to 1-month lag in RBI reporting)
The combined deficit (merchandise + services) in first 11 months of FY22 is already 6.34 times the deficit figure for FY21. It could widen further by Mar-22. Based on trade indicators, the current account deficit could sharply widen in the Mar-22 quarter.
Major takeaways from the current account data for Dec-21 quarter
Here are some 4 key takeaways from the current account data for Dec-21 quarter.
Purely based on the trade data, it looks like Mar-22 quarter could see trade deficit widening sharply and thus impacting the overall current account deficit. Current account deficit has already moved up from 0.3% of GDP in Jun-21 quarter to 1.3% in Sep-21 quarter to 2.7% in the Dec-21 quarter. This could just widen to beyond 3% in the Mar-22 quarter.
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