Current account balance to revert to deficit of 0.8% of GDP in Q1: India Ratings

India's current account balance will revert to a deficit of around $8 billion, or 0.8 percent of the GDP, during the first quarter of FY25 from a surplus of about $5.7 billion, or 0.6 percent of GDP in the last quarter of FY24. This is according to an analysis carried out by India Ratings and Research, Ind-Ra. This is in contrast to the deficit of $9.0 billion, or 1.0 per cent of GDP, recorded during the same quarter of the last year, and reflects the variability in the country's external trade dynamics.

Ind-Ra attributed the expected deficit to be caused by factors such as a mere 1.0 per cent YoY growth in merchandise exports to around $108 billion in Q2FY25, on the back of a supportive statistical base effect. On the other hand, merchandise imports are expected to rise 3.5 per cent YoY to around $176 billion in the same period, resulting in a goods trade deficit of around $68 billion.

The global economic environment remained mixed, resilient, but beset by uncertainty in trading activity. While global trade rose 1.4 per cent year-on-year in the first quarter of FY25, the first contraction in the global manufacturing Purchasing Managers' Index for 2024 was seen in July, extending into August. This has, therefore, accordingly tempered expectations of robust export growth in the forthcoming quarters.

One cause for concern is the unstable political environment in Bangladesh, one of India's top 10 export destinations. Further disturbance in the garments industry of Bangladesh, which is a major contributor to the country's economy, would contribute to negatively impacting India's exports of textile raw materials and petroleum products. Ind-Ra draws attention to the fact that this could prove to be a silver lining, as it creates opportunities for India to increase its downstream textiles exports since Bangladesh's textiles export stood at $47.38 billion in 2023.

While goods trade shows signs of weakness, particularly due to elevated interest rates, the services sector is still a sweet spot. The global services PMI stood at 53.3 in July 2024, marking 19 consecutive months of expansion. Ind-Ra estimates the services trade surplus to increase 10.6 per cent y-o-y and reach around $44 billion in Q2 FY25.

Looking ahead, Ind-Ra estimates the current account deficit to widen up to approximately 1 per cent of GDP in the second quarter of FY25 impelled by the existing dynamics of global trade and domestic economic activity. According to Paras Jasrai, Senior Analyst at Ind-Ra, these are the trends which require extra vigil when India is passing through an unfavourable global economic tide.