Introduction
In a significant economic development, the Reserve Bank of India (RBI) announced on Monday, June 24, 2024, that India has achieved a current account surplus of USD 5.7 billion, or 0.6 percent of GDP, for the March quarter of fiscal year 2023-24 (FY24). This marks a substantial improvement from the same period last year, which saw a current account deficit of USD 1.3 billion or 0.2 percent of GDP. The announcement, part of the RBI's release on the Developments in India's Balance of Payments, highlights the country's economic resilience and growing financial stability in the face of global economic challenges.
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Quarterly Performance Analysis
The March quarter's performance is particularly noteworthy when compared to the previous quarter ending December 2023, which recorded a deficit of USD 8.7 billion or 1 percent of GDP. This turnaround from deficit to surplus within a single quarter underscores the dynamic nature of India's economy and its ability to adapt to changing global economic conditions.
Key factors
1. Merchandise Trade: The merchandise trade deficit narrowed to USD 50.9 billion in the quarter, down from USD 52.6 billion a year earlier. This reduction in deficit, albeit modest, played a crucial role in improving the overall balance.
2. Services Sector Growth: Net services receipts increased significantly to USD 42.7 billion from USD 39.1 billion in the previous year. The RBI attributed this growth to a 4.1 percent expansion in the services sector, particularly in software, travel, and business services exports.
3. Remittances: Private transfer receipts, primarily remittances from Indians working abroad, saw a substantial growth of 11.9 percent, reaching USD 32 billion in the March quarter.
4. Non-resident Deposits: These deposits increased to USD 5.4 billion in January-March, up from USD 3.6 billion in the same period the previous year, indicating growing confidence in the Indian economy among non-resident Indians.
5. Foreign Portfolio Investment: FY24 saw a net inflow of USD 44.1 billion in portfolio investments, a dramatic turnaround from the USD 5.2 billion outflow in the previous year. This influx of foreign capital has been instrumental in supporting the rupee and bolstering India's foreign exchange reserves.
However, it's worth noting that net FDI for FY24 dropped to USD 9.8 billion from USD 28 billion in FY23, indicating a potential shift in long-term investor sentiment that may require attention from policymakers.
Detailed Component Analysis
1. Services Exports:
The RBI highlighted that services exports grew by 4.1 percent year-on-year in the fiscal fourth quarter, driven by rising exports of software, travel, and business services. This growth underscores India's strength in the IT and services sectors, which continue to be major contributors to the country's economic growth.
India's Finance Minister Nirmala Sitharaman. File Photo (First Post)
2. Net Services Receipts:
Net services receipts reached USD 42.7 billion, higher than the USD 39.1 billion recorded a year earlier. This increase not only contributed to the current account surplus but also reinforced India's position as a global services hub.
3. Merchandise Trade Deficit:
The merchandise trade deficit narrowed to USD 50.9 billion in the quarter, from USD 52.6 billion a year earlier. While the improvement is modest, it reflects efforts to boost exports and manage imports more effectively.
4. Primary Income Account:
The net outgo in the primary income account, which primarily reflects investment income payments, rose to USD 14.8 billion from USD 12.6 billion a year earlier. This increase could be attributed to higher returns on foreign investments in India, indicating growing investor confidence.
5. External Commercial Borrowings:
Net inflows from external commercial borrowings in India amounted to USD 2.6 billion, up from USD 1.7 billion in the same quarter of the previous year. This increase suggests improved access to international credit markets for Indian companies.
Future Outlook
Experts are cautiously optimistic about India's economic prospects, with Madan Sabnavis, chief economist at Bank of Baroda, predicting that the country's current account deficit (CAD) will be manageable at 1-1.5 percent of GDP in the fiscal year 2024-25. He anticipates steady capital inflows, ensuring that the balance of payments, reflecting the fundamentals, remains comfortable.
This positive outlook is based on several factors. Firstly, the continued growth in services exports, particularly in India's IT and services sectors, is expected to provide a steady stream of foreign exchange earnings. Additionally, stable remittances from the large Indian diaspora working abroad are likely to remain a significant contributor to the current account balance. Moreover, despite a drop in foreign direct investment (FDI), the strong inflow of portfolio investments indicates sustained interest from foreign investors in Indian markets. Finally, the Indian government's policies aimed at boosting exports through various initiatives and improving the ease of doing business are expected to further support the external sector.
Conclusion
India's achievement of a current account surplus in the March quarter of FY24, coupled with the significant reduction in the current account deficit for the entire fiscal year, reflects the country's economic resilience and adaptability. The growth in services exports, robust remittances, and strong portfolio investments have played crucial roles in this turnaround.
However, challenges remain, particularly in terms of attracting long-term foreign direct investment and managing the merchandise trade deficit. As India navigates the complex global economic landscape, maintaining this positive momentum will require continued focus on enhancing competitiveness, diversifying exports, and creating an environment conducive to both domestic and foreign investment. The RBI's data and analysis provide valuable insights into India's economic performance and offer a basis for informed policy decisions. As the country moves forward, balancing growth with financial stability will be key to sustaining and building upon these positive trends in the coming years.
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