Analysis of India's Current Account Surplus

Analysis of India's Current Account Surplus

India’s current account balance turned to a surplus (after more than a decade) of 0.1% of GDP (or USD 0.6 billion) for the January-March 2020 period, compared to a current account deficit of 0.7% of GDP (or USD 4.6 billion) in the year ago period. India saw a current account deficit of 0.4% in the October-December 2019 period. For the full fiscal year 2019-20, the current account deficit narrowed to 0.9% of the GDP compared to 2.1% in financial year 2018-19.

There are two factors that have primarily resulted in this current account surplus – a narrowing trade deficit and a significant increase in net invisible receipts.

India’s trade deficit narrowed to USD 35 billion (4.8% of GDP) in quarter ended March 2020 from USD 36 billion (5% of GDP) in the quarter ended December 2019. The general slowdown in imports due to the Covid-19 crisis along with a significant reduction in oil prices played a major role in reducing the trade deficit. Additionally, India’s export dependence is lower compared to other emerging market economies. The composition of discretionary goods (the demand for which reduces the most in such crises) such as luxury goods, auto, etc., is also low in India’s exports.

India’s net invisible receipts increased to USD 35.6 billion (4.8% of GDP) from USD 33.4 billion (4.6% of GDP). “Invisibles” include the import & export of services, private remittances from abroad and payments to foreign countries, and incomes earned by MNCs from their investments in India. The increase in net invisible receipts was driven mainly by an increase in private remittances. Remittances by Indians employed overseas and other private transfers rose by 14.8% from a year ago to USD 20.6 billion. Net outflows from overseas investment income payments also decreased to USD 4.8 billion from USD 6.9 billion a year ago. Net services receipts increased on the back of a rise in net earnings from computer and travel services on a year-on-year basis.

Foreign Direct Investments (FDI) have also been rising. Net FDI at USD 12.0 billion in Q4 of 2019-20 was higher than USD 6.4 billion in Q4 of 2018-19. This, along, with the surplus in current account balance, may also help boost the performance of the Indian rupee. The Indian rupee has appreciated by more than 1% last week.

Overall, India’s external position might be well placed in comparison to most other emerging markets. It will, therefore, be interesting to observe the current account surplus and the performance of the Indian rupee in the coming months and quarters.

Sources: Various publications

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