How current account deficit will fare in 2024?

2024 is just around the corner, and there are diverse viewpoints about the growth of the Indian economy. Amid the slowing trade, there are many projections about the current account deficit in India. As per many credit rating agencies, the CAD will average 1.8 per cent of GDP in 2023-2024 compared with 2.0 per cent of GDP in 2022-2023, according to a report by Crisil. Current account deficit is said to occur when the value of a country's imports of goods and services is greater than its exports. On the other hand, ICRA expects the CAD to be 2.1 per cent of GDP in FY24. 

“Lower international commodity prices year-on-year and support from healthy services exports and remittances will help CAD narrow this fiscal,” the report read. According to the report, the CAD rose to 1.1 per cent of GDP in the first quarter of fiscal 2024 from 0.2 per cent of GDP in the previous quarter. Economists believe that a strong services surplus along with resilient remittances is cushioning the impact of increasing trade deficit. 

India's current account deficit (CAD) dropped from $17.9 billion (2.1 per cent) in Q1 of 2022-23 to $9.2 billion (1.1 per cent of GDP) in Q1 of 2023–24, according to a release from the RBI, but it was still greater than $1.3 billion (0.2 per cent of GDP) in the preceding quarter.

Despite the increase in the trade deficit, economists and experts believe that the current account deficit is likely to be about 1.4 per cent to 2 per cent of GDP. In 2022-23, CAD was $67 billion, or 2 per cent of that year’s GDP.

The current account deficit (CAD) remains eminently manageable, driven by strong services exports and remittances, the Reserve Bank of India (RBI) said in its Financial Stability Report.  According to the central bank services exports and remittances are lending stability and sustainability.

“External sector resilience has been a key factor in improving domestic macroeconomic stability. Despite overlapping global shocks, the trade deficit improved from $189.2 billion in April-November 2022 to $ 166.4 billion in April-November 2023,” RBI added.

As per the RBI report, the inclusion of the Indian government securities in the JP Morgan Global Bond Index - Emerging Markets from June 2024 could augur well for the outlook for capital flows to India. The report mentioned that external commercial borrowings (ECB) and non-resident deposits have also registered net inflows in 2023-24.

However, foreign direct investment (FDI) remained subdued, reflecting the global reduction of these flows and an uptick in repatriations of FDI from India. “Overall, the increase in FPI, ECB, and non-resident deposit inflows is expected to offset the decline in FDI and support the financing of the CAD.” the RBI opines.

The RBI believes that the evolution of the trade balance would depend on the impact of the slowdown in global demand on merchandise exports; and the trajectory of imports, given strong domestic demand and volatile oil prices stemming from geopolitical conflicts.

The report also threw light on external vulnerability indicators and said, “ “External vulnerability indicators continue to show improvement: foreign exchange reserves of $616.0 billion as of December 15, 2023, are sufficient to cover about ten months of actual imports (on a BoP basis) for 2022-23.”

In addition, external debt moderated to 18.6 per cent of GDP in June 2023, and the share of short-term debt (with an original maturity of up to one year) in total external debt declined to 19.6 per cent in June 2023.