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

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.

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.