Economic & Finance

Why A Current Account Surplus can be Detrimental to India’s Economy

current account surplus

Although India has had sporadic current account surpluses in recent years, there have been rumors of sustained surpluses. Nevertheless, it is not a favourable prospect if India is to continue on its growth path. There is a lopsided view among economists on whether the country can attain current account neutrality or, for that matter, a current account surplus.

Although economists have divergent views on whether the country can achieve current account neutrality, or even a current account surplus, one thing is common to all of them: commodity prices.

According to Rahul Bajoria, chief India economist at Barclays, crude oil prices have crossed $97 per barrel, and “any talk of neutrality goes away.”.

India’s current account deficit in the June quarter was $9.2 billion, or 1.1% of GDP, due to a higher trade deficit, a decrease in net services surplus, and a decline in private transfer receipts. In the same quarter last year, GDP increased by 2.1%, but in the January-March quarter, GDP decreased by 0.2%.

According to Madhavi Arora, lead economist at Emkay Global Financial Services Ltd., it was at near 1% of GDP and was comfortably funded by robust capital flows. Arora expects that the deficit in the coming quarter will widen as crude oil prices increase, core imports rise, and service exports slow down.

As a result, the 2Q CAD/GDP ratio may be more than double that of 1QFY24, ranging from 2.4 to 2.6%.

It stood at $1.3 billion in the previous quarter. For context, crude oil, India’s largest import, was priced at $75–80 per barrel.

During the first quarter of FY22, it recorded a current account surplus of $6.5 billion, or 0.9% of GDP. Only three times has India posted a current account surplus in the last decade. Generally, India’s imports to the rest of the world outstrip its exports, which makes this phenomenon rare.

In the last decade, India has reported a current account surplus four times

In the foreseeable future, we will remain in deficit due to commodity prices and demand conditions in the economy, Bajoria told BQ Prime.

Details are what make the difference

In the March quarter, the current account deficit narrowed sharply thanks to a record 26.6% increase in services exports in the last financial year and five-year-high remittance inflows. India has also made significant contributions in fintech, banking and insurance services, hospitality, biotechnology, logistics, and medical care, among other highly skilled segments.

In 2022–23, merchandise exports rose just 6% to $447 billion, while services imports grew 22.2% to $179.7 billion.

Indian exports have stagnated in the last decade, despite a GDP growth rate of 5%. Imports, however, have risen due to military, microchips, technology, and commodity imports.

Sajjid Chinoy of JP Morgan says India must boost its merchandise exports for sustainable growth and competitiveness.

As the world becomes more protectionist, we need to work hard to boost our exports,” JP Morgan India’s chief India economist told BQ Prime on Monday.

He expects India’s current account deficit to be 1–1.5% of GDP in the next couple of years, but will watch out for factors driving economic growth, such as a potential increase in domestic income.

Growth Finance: A Crucial Nexus

In light of the country’s low per capita income, Chinoy noted that a current account surplus is a sign of depressed demand, but is not desirable. It is the combination of foreign capital, domestic savings, and private capital expenditures that will drive growth.

It will be evident that, even if service exports have picked up, when we obtain the private capex that we have been waiting for and domestic demand strengthens and broadens, imports will rise. Chinoy said capital goods imports are needed to reflect the fact that the capex cycle has begun. Neelkanth Mishra, Chief Economist at Axis Bank Ltd., has a different perspective.

Mishra told BQ Prime earlier that India is likely to achieve current account neutrality if oil prices stabilize and its economy continues to grow at 6%. According to Chinoy, the preference is to run a current account deficit.

It has been a hot topic for several years about India’s imported inflation, but Bajoria pointed out that the country’s energy consumption is growing slower than its real GDP. In essence, this means that India’s economic growth is decoupled from energy demand.

At the margin, the energy intensity of growth appears to be declining… “I think this might be due to renewable energy coming into play or being able to get more growth out of the same amount of energy consumption—basically productivity,” Bajoria explained.

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I'm Shruti Mishra, Editorial Director @Newsblare Media, growing up in the bustling city of New Delhi, I was always fascinated by the power of words. This love for words and storytelling led me to pursue a career in journalism. In this position, I oversee the editorial team and plan out content strategies for our digital news platform. I am constantly seeking new ways to engage readers with thought-provoking and impactful stories.

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