The FY2022-23 economic report released today by the Treasury says the current account deficit (CAD) is expected to be within sustainable limits for the remainder of FY23 due to a decline in crude oil prices. The CAD stands for measuring a country’s trade when the value of imported goods and services exceeds the value of exported goods and services.
“While recognizing the potential negative developments, it is important to consider the inherent buffers for India’s external sector. India’s export of services, which is mainly contributed by software, business and travel services, although remaining robust year to date, embodies a greater degree of resilience. India consolidates its position as the world’s top recipient of remittances, with inbound remittances projected to reach record levels in 2022,” the survey reads.
“Accordingly, a large surplus in services and remittances would cushion the widening trade deficit. By consolidating an increasing share of non-debt flows in funding CAD over the years, year-to-date net FDI inflows have remained resilient, while net FPI inflows have turned positive in recent months. This would put the CAD within manageable limits and would be very financeable,” it continues.
According to Reserve Bank of India balance of payments data, India’s CAD rose to an all-time high of $36.4 billion in the second quarter of fiscal 2022-23 in the previous quarter and far higher than $9.7 billion a year ago.
The survey states that the widening of the current account (CAD) deficit in the second quarter of FY23 was mainly due to a higher goods trade deficit of US$83.5 billion and an increase in net investment income. For the period April-September 2022 (H1FY23), India recorded CAD of 3.3% of GDP due to an increase in the goods trade deficit, compared to 0.2% in H1FY22.
“Overall, the unfavorable global economic situation has put pressure on India’s balance of payments (BoP) in 2022. While the impact of a sharp rise in oil prices was felt in CAD expansion, Federal Reserve monetary policy tightening and CAD strengthening, the US dollar led to FPI outflows. As a result, as net financial inflows remained below the CAD , saw a US$25.8 billion BoP-based foreign exchange reserve drawdown in H1FY23 as opposed to a US$63.1 billion gain in H1FY22. But huge valuation losses (48, $9 billion) contributed to the net depletion of $74.6 billion in nominal reserves during the period,” the survey said.
Meanwhile, the country’s foreign exchange reserves were US$562.72 billion at the end of December 2022, accounting for 9.3 months of imports, and the external debt-to-GDP ratio at the end of September 2022 is at a comfortable level of 19.2% at the end of November 2022 According to the IMF, India was the sixth largest holder of foreign exchange reserves in the world.
