India's Current Account Deficit Narrows Significantly

By: Damini Mehta

In the first half of the fiscal year 2023-24, the cumulative current account deficit more than halved to $17.5 billion, or 1.0 percent of GDP, compared to the corresponding period in the previous fiscal year when it stood at $48.8 billion, or 2.9 percent of GDP.

India's economic landscape has witnessed a significant transformation in recent months, with the current account deficit (CAD) narrowing to $8.3 billion in the second quarter of the 2023-24 fiscal year, according to data released by the Reserve Bank of India (RBI) on December 26. This represents a noteworthy decline from the corresponding quarter in the previous fiscal year when the deficit stood at a substantial $30.9 billion, accounting for 3.8 percent of India's GDP.

The most recent data reveals that the CAD for July-September 2023 accounted for 1.0 percent of India's GDP, down from 1.1 percent in the preceding quarter (April-June 2023), where the deficit was $9.2 billion. The primary driver behind this positive shift is the notable narrowing of the merchandise trade deficit, which decreased from $78.3 billion in July-September 2022 to $61 billion in the same period of 2023.

Breaking down the balance of payments data, the rise in the goods trade deficit from April-June was offset by a $4.8 billion quarter-on-quarter increase in the services trade surplus, reaching $40 billion. Notably, the services sector played a pivotal role in mitigating the impact of the merchandise trade deficit.

In the first half of the fiscal year 2023-24, the cumulative current account deficit more than halved to $17.5 billion, or 1.0 percent of GDP, compared to the corresponding period in the previous fiscal year when it stood at $48.8 billion, or 2.9 percent of GDP. This positive trend has contributed to a more favorable economic outlook for India.

Looking ahead, economists anticipate a potential widening of the current account deficit in the October-December quarter, primarily due to the expansion in the merchandise trade deficit in October. Analysts project a potential increase to around $18-20 billion for the ongoing quarter. However, it's worth noting that this widening is expected to be a temporary phenomenon, and the overall CAD for the fiscal year 2023-24 is predicted to be in the range of 1.5-1.6 percent of GDP, barring any sharp rebounds in commodity prices.

In summary, the recent narrowing of India's current account deficit is a positive development for the country's economic health. The improved trade balance, coupled with the resilience of the services sector, has contributed to a more stable external position. However, ongoing global economic uncertainties and potential fluctuations in commodity prices remain key factors to monitor as India navigates the challenges and opportunities on its economic journey.