India’s balance of payment scenario in Q3 FY23 fared relatively well despite global headwinds. On the current account front, upbeat services exports and healthy remittances helped cushion the impact of an elevated merchandise trade deficit. The capital account gained from foreign investments and inflows from banking capital, translating into an overall balance of payment surplus compared to a deficit in the previous quarter. In the final quarter of FY23, while merchandise exports will remain weak, imports are also likely to fall further, resulting in further moderation in the merchandise trade deficit. Moreover, buoyancy in the services trade surplus and remittances are likely to continue. This signals some relief for India’s external sector scenario with the current account deficit (CAD) projected at 2.1% of GDP in FY23, much better than our earlier expectation. However, it is important to note that despite the better-than-expected FY23 CAD estimates, this figure remains elevated compared to the previous years. In FY24, we expect CAD to moderate further to 1.6% of GDP, supported by healthy services sector exports. A better-than-expected current account will be supportive of the overall balance of payment scenario. This will reduce India’s external vulnerability in the midst of global economic uncertainties.
Current Account Scenario
The current account deficit narrowed to USD 18.2 billion (2.2% of GDP) in Q3 FY23 from USD 30.9 billion (3.7% of GDP) in the previous quarter. The elevated merchandise trade deficit continued to be the primary driver of the current account gap in the third quarter. However, the merchandise trade deficit narrowed to USD 72.7 billion (8.6% of GDP) in Q3 FY23, lower compared to USD 78.3 billion (9.5% of GDP) in Q2 FY23. While the sequential narrowing in the merchandise trade gap is positive, it is important to note that this is on account of a fall in both imports as well as exports compared to the previous quarter instead of the ideal scenario of higher export growth. Though the merchandise trade gap as a ratio to GDP moderated, it stayed elevated above 8.5% for the second quarter in a row, a level not seen in almost a decade. Prices of global commodities came off their highs in Q3 FY23 contributing to lower value of imports and exports, even while exports continued to be pressured by the weakness in global demand. Encouragingly, the net invisible receipts were upbeat on the back of a strong services trade surplus and net transfers (remittances) which helped cushion the impact of the elevated merchandise trade gap. In Q3 FY23, receipts from services exports grew by 24.5% y-o-y, driven mainly by exports of software services
which recorded growth of 18.5% y-o-y. The upbeat services exports translated into a record-high services trade surplus of USD 38.7 billion. Software services which are the largest component of India’s services trade recorded an all-time high trade surplus of USD 33.5 billion. The trade balance for travel services posted a surplus of USD 1.2 billion in Q3 FY23, turning positive for the first time since Q4 FY20. This is reflective of the waning impact of the pandemic-led disruptions on travel & tourism activities. Net private transfer receipts, which reflect the remittances by Indians employed overseas, rose to USD 28.6 billion in Q3 FY23, higher by 33.5% y-o-y.
In Q3 FY23, global commodity prices remained elevated with crude oil prices ruling above USD 85 per barrel. However, in the final quarter of FY23, global crude oil prices retreated to USD 75-82 per barrel. This moderation in global commodity prices is expected to reduce the merchandise trade gap during the remainder of FY23. On the invisibles front, we expect buoyancy in net services receipts and remittances to continue. Given this background, we estimate CAD in this fiscal to be at 2.1% of GDP.
Capital Account Scenario
The capital account recorded a net inflow of USD 30.2 billion in Q3 FY23 as against a net inflow of USD 22.5 billion in the same quarter last year. Sequentially, net capital inflows improved notably from USD 1.4 billion in the previous quarter. Foreign investment witnessed inflows worth USD 6.7 billion in Q3 FY23 with foreign portfolio investments contributing to more than half of the investment inflows. Net FDI inflows moderated both on an annual as well as sequential basis to USD 2.1 billion. On a cumulative basis, the net FDI inflows were at USD 21.7 billion, the lowest in the same period of the last eight years reflective of subdued investment sentiment amid slowing global growth. Net foreign portfolio investment (FPI) inflows came at USD 4.6 billion, moderating from USD 6.5 billion in the previous quarter. Cumulatively, portfolio investments witnessed net outflows of USD 3.5 billion, higher than outflows of USD 1.6 billion in the same period last year. With global interest rates rising, External Commercial Borrowings (ECB) to India recorded a net outflow of USD 2.6 billion, higher than outflows of USD 0.4 billion in the same quarter last year.
In the final quarter of FY23, domestic stock market volatility and global risk-off sentiment amid a slew of bank runs have dampened FPI inflows. Subdued global investment sentiment amid slowing growth is expected to weigh on the FDI flows too.
Outlook for FY24
The evolving scenario of the merchandise trade balance will be the key determinant of the current account balance in the year ahead. Amid weakness in global demand, exports are likely to remain pressured. Thus, we project exports to contract by 5% in FY24 following an estimated growth of 3.5% in FY23. Lower global commodity prices are expected to translate into a lower value of imports easing the pressure on the merchandise trade gap. Based on the assumption that crude oil prices remain range-bound at the current levels, we project imports to contract by 4% in FY24 on the back of healthy growth in FY23 (estimated at 15%). We expect the net services receipts and remittances to be the bright spot in the current account. We project CAD to GDP ratio to improve to 1.6% in FY24 from an estimated 2.1% in the current fiscal year. On the capital account front, global factors such as the economic growth scenario and the pace of monetary tightening by key central banks would be the major determinants for capital flows. Overall, we expect the balance of payment scenario to improve on account of the better-than expected current account scenario.
