India’s current account swings to surplus in Q1

A contraction in the trade deficit and an increase in net services receipts swung India’s current account balance to a surplus of $6.5 billion (0.9 per cent of gross domestic product, or GDP) in the first quarter of financial year 202122 (Q1FY22) as against a deficit of $8.1 billion, or one per cent of GDP, in Q4FY21.

In comparison, the surplus was $ 19.1 billion, or 3.7 per cent of GDP, in Q1FY21, according to the Reserve Bank of India (RBI). In fact, the current account ended in a surplus of 0.9 per cent of GDP in FY21, the first time in 17 years.

The trade deficit for goods contracted to $30.7 billion in Q1 from $41.7 billion the previous quarter. It was $ 11.7 billion in the corresponding quarter last year.

Aditi Nayar, chief economist of ICRA, said the impact of the second wave of Covid-19 on demand for fuel and gold, in particular, compressed the trade deficit, leading to the current account surplus. However, the size of the surplus was higher than ICRA’S forecast, led by an encouraging performance of the services sector and secondary income, mostly comprising workers’ remittances.

Net services receipts increased, both sequentially and year-on-year (YOY), on the back of robust performance of net exports of computer and business services.

Private transfer receipts, mainly representing remittances by Indians employed abroad, amounted to $20.9 billion, an increase of 14.8 per cent from a year ago, the RBI said.

Net outgo from the primary income account, a reflection of net overseas investment income payments, decreased sequentially as well as YOY.

In the financial account, net foreign direct investment inflows totalled $11.9 billion in Q1, as against an outflow of $0.5 billion last year.

There was an accretion of $31.9 billion to the foreign exchange reserves (on a balance of payments basis) compared with $19.8 billion last year.

Nayar said the current account surplus seen in Q1 will prove temporary, giving way to a roughly balanced position in Q2. That balance is expected to move into a deficit of around $10-12 billion each in Q3 and Q4, as demand recovers and economic activity reverts above pre-covid levels.