InvestorQ : Can you tell me about why the current account deficit for the latest quarter expanded so widely?
Anamika Sodhani made post

Can you tell me about why the current account deficit for the latest quarter expanded so widely?

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Angel dcosta answered.
1 month ago
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The current account balance is announced by the RBI with a lag of 3 months. So, on 31-March, the RBI announced current account numbers as of Dec-21 quarter. From a current account surplus of $6.6 billion in Jun-21, it went into a current account deficit of ($9.6) billion in Sep-21 and in the latest quarter, the current account deficit has deepened further to ($23.0) billion in the latest Dec-21 quarter. That is nearly 2.7% of the GDP.

What has contributed to the spike in the current account deficit? There have been several factors as enumerate below.

a) The merchandise trade deficit (goods exports – goods imports) widened very sharply from ($34.6) billion in Dec-20 quarter to ($60.4) billion in Dec-21 quarter. Apart from crude oil, gold imports and supply chain constraints also played a key role.

b) The surplus on services continues to be positive. However, the growth is not robust enough to offset merchandise deficit. Services surplus expanded from $23.2 billion to $27.8 billion, but in that period, the merchandise trade deficit almost doubled.

c) The other header of current account viz. Primary outflows on account of investments pay-outs in the form of interest and dividends increased marginally. However, that has never been a very critical factor in the current account deficit number.

Let us quickly dwell on how the current account deficit of $23 billion was calculated and how the four key factors interplayed.

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)

Even as India is celebrating $400 billion of merchandise exports in FY22, the total merchandise imports have got close to $600 billion. It surely feels good to say that overall trade has crossed the level of $1 trillion for the first. However, it also means that the trade deficit is now well inching closer to $200 billion. That rapidly rising trade deficit is one of the key factors driving the current account deficit higher.

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