InvestorQ : Is it true that India’s current account deficit is likely to be higher in FY22?
Deepa Salunkhe made post

Is it true that India’s current account deficit is likely to be higher in FY22?

Arya Nanda answered.
12 months ago

The actual current account balance data for the March quarter will only be out on the last day of June. However, India Ratings has given out some estimates of how current account deficit could pan out in the March quarter and for the full year FY22. As the India Ratings Estimates, India’s current account deficit for FY22 is expected to be around $43.81 billion in absolute terms or nearly 1.8% of GDP. Current account deficit is the total of trade deficit and the impact of invisibles trade as well as remittance flows into India.

Full year current account deficit at 1.8% for FY22 shows a sharp deterioration over FY21. For FY22, the current account deficit is estimated at 1.8% of GDP. On the other hand, in FY23, the current account had a surplus of $23.91 billion or approximately 0.9% of GDP. If that is discouraging, there is good news too. Q4 current account deficit (CAD) may have actually tapered to $17.3 billion or about 1.96% of GDP. This is sharply lower compared to the CAD of $23.02 billion or 2.74% of GDP in Q3FY22. Sequentially, the figure is substantially lower.

Why exactly did the current account improve in the fourth quarter over third quarter. Remember, as of now these are just estimates and not the actual data. The visible improvement in merchandise imports in FY22 made a big difference. If you look at FY22 exports, it has grown by 42.4% yoy and for FY22, it also touched an all-time high of $418 billion even as total trade crossed the $1 trillion mark for the first time ever.

However, experts opine that the real unravelling of the problem could happen in FY23. That is because Indian economy is expected to face a number of headwinds like global economic uncertainty, Ukraine war impact, lockdowns in China causing supply chain bottlenecks etc. In addition, hawkishness of the central banks is also a major overhang. World Bank has lowered its forecast for global GDP growth for 2022 from 4.1% to 2.9% and even India growth has been lowered to 7.5%. That is likely to spill over to weak exports.

The real policy is not about the amount of the deficit but the composition of the deficit. For instance, imports of gold, coal, coke and briquettes have gone up exponentially in last two years. This is apart from the pressure from the oil front. Rising current account deficit is a worry not just because of the impact on the Indian rupee value but also due to its potential impact on the sovereign ratings of the Indian economy. That is a worry.