India’s current account deficit (CAD) is expected to hit a nine-year or 36-quarter-high level of 3.4 per cent of the gross domestic product (GDP) in the first quarter of this financial year against a surplus of 0.9 per cent a year ago, according to a report by India Ratings (Ind-Ra). In absolute terms, the country’s CAD touched $28.4 billion, or 3.4 per cent of GDP, in the April-June 2022 as against a deficit of $13.4 billion (or 1.5 per cent of GDP) in 4QFY22.
In the first quarter of the last financial year 2021-22, current account was in surplus of $6.6 billion or 0.9 per cent of GDP. “Although the merchandise exports touched a record high of $121.2 billion in 1QFY23, Ind-Ra believes that they are likely to slow down and come in at $104.2 billion in 2QFY23, growing by a meagre 1.4 per cent yoy in 2QFY23 (2QFY22: 38.6 per cent yoy) due to the global headwinds,” the rating agency said in the report released on Friday.
The International Monetary Fund in its July update on the World Economic Outlook trimmed its forecast for global GDP growth to 3.2 per cent in 2022 from 3.6 per cent earlier in April 2022 (2021: 6.1 per cent). Also, GDP forecasts of some of India’s key exporting destinations such as the US, Eurozone and China have been revised downwards. This may put India’s exports targets of $750 billion (goods and services) for FY23 in jeopardy.
Ind-Ra expects merchandise imports to remain robust due to i) elevated global commodity prices (Brent crude averaged August 2022: $100.7/barrel) and ii) weak rupee. The agency expects the Indian rupee to average $79.6 against the US dollar in 2QFY23.
“Furthermore, the merchandise imports, which grew 40.5 per cent yoy during July-August 2022 to $128.2 billion, is expected to come in at $192.2 billion in 2QFY23, increasing by 30.3 per cent yoy (2QFY22: 67.1 per cent yoy). All in all, Ind-Ra expects the merchandise trade deficit to come in at a fresh high of around $87 billion in 2QFY23,” the agency added.
India’s merchandise exports reached $121.2 billion in 1QFY23 (4QFY22: $117.0 billion) from $95.5 billion in 1QFY22, despite the Russia-Ukraine conflict. The yoy growth moderated to a five-quarter low of 26.8 per cent due to the high base effect (1QFY22: 85.7 per cent). The growth slowdown and high inflation in advanced economies coupled with disruptions in the global supply chain have begun to impact India’s merchandise exports as it grew at a tepid 1.9 per cent yoy in July-August 2022.
“Key commodities such as ‘petroleum products’, ‘telecom instruments’, ‘ready-made garments cotton inclusive accessories’, ‘wheat’, ‘sugar’, ‘articles of iron & steel’, ‘gold and other precious metal jewellery’, ‘motor vehicles’ and ‘aluminium & its products’ accounted for more than 80 per cent of the merchandise exports growth in 1QFY23,” India Ratings said.
It added that while the volumes of these commodities grew in the range of 5.7 per cent to 200.1 per cent yoy, the value growth ranged between 28 per cent to 268.3 per cent yoy. This indicates that the value growth in the merchandise exports was more pronounced than the volume growth in 1QFY23 as has been the case in the previous few quarters.