Sunday, 23 Mar, 2025
By: Damini Mehta
Source: Freepik
Remittance flows from Indians working abroad further strengthened the current account position. These inflows have historically been a stable source of foreign exchange for India, providing a crucial cushion against the merchandise trade deficit.
India's current account dynamics saw notable improvements in the financial year 2023-2024 (FY24), particularly highlighted by a current account surplus recorded in the final quarter. This surplus of 0.6% of GDP in Q4 FY24 marked a significant turnaround driven primarily by robust growth in service exports, lower merchandise trade deficit and steady remittance inflows, underscoring the country's resilience amid global economic uncertainties.
In Q4 FY24, India's service exports reached $87.7 billion, while service imports stood at $42.8 billion, resulting in a record services trade surplus of $44.9 billion . This increase in service exports was a pivotal factor in the overall current account surplus. Key sectors contributing to this growth included information technology, business services, and financial services. The rise of Global Capability Centers (GCCs) in India, leveraging the country's skilled workforce and improved infrastructure, significantly boosted business services exports, which now constitute a substantial part of India's service exports.
Drivers Behind the Surplus
Remittance flows from Indians working abroad further strengthened the current account position. These inflows have historically been a stable source of foreign exchange for India, providing a crucial cushion against the merchandise trade deficit. Meanwhile, the merchandise trade deficit, although a persistent challenge, remained relatively stable. In Q3 FY24, the merchandise trade deficit was $71.6 billion, only marginally higher than the $71.3 billion recorded in Q3 FY23.
Comparing this to the previous financial year, FY23 saw a higher current account deficit (CAD), driven by a significant merchandise trade deficit and slower growth in service exports. The CAD in Q3 FY23 was 2% of GDP, in contrast to the reduced 1.2% of GDP in Q3 FY24. The narrowing of the CAD in FY24 highlights stronger performance in the service sector and moderated merchandise trade deficits, showcasing an overall improvement in India's external economic position.
BOP Sees a Boost due to CAD Surplus
The balance of payments (BoP) situation also saw improvements in FY24. There was an accretion of $6.0 billion in foreign exchange reserves in Q3 FY24, compared to $11.1 billion in Q3 FY23. The financial account recorded positive inflows, with net foreign direct investment (FDI) at $4.2 billion in Q3 FY24, significantly higher than the $2.0 billion in Q3 FY23. Additionally, foreign portfolio investments surged to a net inflow of $12.0 billion in Q3 FY24, up from $4.6 billion in the same period the previous year.
The substantial improvement in India's current account position, particularly in the final quarter of FY24, underscores the strength of the country's economic fundamentals. The critical role of the service sector and remittances in balancing the external accounts is evident. With continued focus on enhancing service exports and maintaining robust remittance inflows, India is well-positioned to manage its current account dynamics effectively. This positive trend not only reflects the resilience of India's economic fundamentals but also enhances the country's attractiveness to foreign investors, contributing to overall economic stability and growth. According to experts, this positive trend in India’s current account and balance of payments will continue in the ongoing finance year as well when India is expected to record a manageable BOP of 1-1.5% of GDP (FY25).
