According to a recent poll by Reuters, India’s current account deficit is likely to have improved in the final quarter of 2022 from a nine-year high in July-September. The poll surveyed 22 economists between March 16-23, and the median forecast showed a current account deficit of $23.0 billion in October-December 2022 or 2.7% of gross domestic product (GDP). Forecasts ranged from $15.0-$28.0 billion, or 2.0%-3.2% of GDP.
In July-September, the gap was $36.4 billion. As a percentage of GDP, at 4.4% it was the highest since mid-2013. However, the expected improvement has had little impact on the Indian rupee (INR), with the outlook for the currency to remain weak and not recoup its 2022 losses over the next 12 months, according to the latest Reuters FX poll.
The narrowing of the current account deficit is due to a reduction in the goods trade deficit, which suggests weakening domestic demand in Asia’s third-largest economy. India’s merchandise trade deficit shrank to $72.79 billion last quarter, compared to $78.32 billion in July-September, according to ministry of commerce data. An increase in net services exports also partly contributed to the improvement, according to Reserve Bank of India figures. They rose to $39.03 billion from the preceding quarter’s $34.43 billion.
Radhika Piplani, an economist at Yes Bank, stated that “Imports have contracted more than expected. Core imports, which are exclusive of volatile components such as oil or gems and jewelry, declined marginally in the December quarter. That tells you how demand is underpinning in India. On the other hand, services have outperformed. These are the two reasons why we are seeing that the (current account deficit) numbers are better.”
A separate Reuters poll of economists who had a longer-term view forecasted the current account gap to average 3.0% of GDP this fiscal year before shrinking to 2.6% in the next. Although the recent trends are certainly encouraging and point to a further narrowing of the external deficit in coming quarters, Nikhil Gupta, research analyst at Motilal Oswal, noted that they are “skeptical about the sustainability of such a high services surplus at this stage.”
Despite the expected improvement, India’s current account deficit is still a cause for concern. A current account deficit occurs when a country imports more goods, services, and capital than it exports, which means that it is relying on foreign capital to fund its consumption and investment. This can make a country vulnerable to sudden changes in investor sentiment, which could lead to capital outflows, a weaker currency, and higher borrowing costs.
India’s current account deficit has been a persistent issue for the country, and while the expected improvement is a positive sign, there is still a need for policy measures to address the underlying structural issues. The government has already taken some steps, such as increasing import tariffs to reduce the trade deficit, and encouraging more foreign investment to finance the current account deficit. However, there is still more that can be done to address issues such as weak export competitiveness, insufficient investment in infrastructure and education, and a lack of diversification in the economy.
In conclusion, while the expected improvement in India’s current account deficit is a positive sign, there is still more work to be done to address the underlying structural issues. The government needs to continue implementing policy measures to promote exports, attract foreign investment, and improve infrastructure and education. These steps will help to reduce India’s reliance on foreign capital and make the economy more resilient to external shocks.