Current Account Deficit for Q2FY23 at record $36.4 billion

The Reuters advance estimates had already pegged India’s current account deficit for the second quarter at a record level. That has turned out to be true. On 29th December, when the RBI announced the current account deficit (CAD) figure for Q2FY23, it came in at a record level of $36.4 billion. In percentage terms, this translates into CAD at 4.4% of GDP. This is exactly double the 2.2% of GDP that the current account deficit had been in the previous June 2022 quarter. What really led to such a rapid and sharp rise in the current account deficit in the September quarter. In India, the RBI normally puts out the CAD figure after a gap of 3 months from the end of the quarter.

The current account deficit of $36.4 billion for the September 2022 is the highest CAD reported by India in any of the previous quarters in history. This breaks the long 10 year old record of the previous high reported in the December 2012 quarter. In the June 2022 quarter, the absolute CAD figure was just $18.2 billion, and in just one quarter the overall current account deficit has doubled. The previous record for the highest CAD was $31.77 billion posted in the third quarter of 2012-13 ending December 2012. The September 2022 is not only an all-time record, but it is also a good 14.6% higher than the previous record CAD of $31.77 billion reported in the December 2012 quarter.

Ironically, the current account deficit for the full fiscal year FY22 was a tad above $38 billion, so the September 2022 quarter alone has equalled the full year CAD of the previous full fiscal year. The one key factor that really led to the sharp widening of the current account deficit was the widening of the merchandise trade deficit to $83.5 billion in the September 2022 quarter. On a QOQ basis, the merchandise trade deficit alone is 32.5% higher, and the key driver of the higher than expected current account deficit in the second quarter of the fiscal. While the surplus in services managed to partially compensate the rise in the trade deficit, the key problem in Q2 was that exports suffered but imports remained sticky.

Most economists had pegged the current account deficit in the September 2022 quarter in the range of $31 billion to $34 billion. The actual CAD was well above the upper range also, showing the kind of pressure that was being exerted by the merchandise trade deficit. In the first six months of FY23, ending in September 2022, the current account deficit stood at a whopping $54.5 billion compared to just about $3.1 billion recorded in the first six months of FY22. The CAD as a percentage of GDP at 4.4%, is substantially higher than the ago ratio of just 1.3%. H1 fiscal deficit for FY23 is 3.3% of GDP and full year promises to be higher.

Several factors contributed to the spike in the CAD. There was the incessant rise in global commodity prices in the aftermath of the Russian invasion of Ukraine in late February this year. In addition, the supply chain constraints imposed by China due to its obsession with the zero-COVID policy also led to a severe spike in input costs, which also hit imports in a big way. As a result, the import bill ballooned to nearly $200 billion in the September quarter. While total trade for the full year is expected to be well above $1.2 trillion, it is going to come with a much higher trade deficit too. The bigger problem was that exports just did not keep pace with the sharp spike in the imports of goods.

If you look at exports, it got hit on two fronts. On the one hand, the merchandise imports were hit by weak demand globally. Due to a series of rate hikes, key global economies like the US, UK and the EU are expected to dip into recession in the coming year. That has dented demand for most consumer products. Secondly, to discourage rampant export of key inputs and ensure domestic supply, the government had also imposed curbs on exports through quotas and duties. That also hit exports. Despite the services trade surplus rising to $34.4 billion in the latest quarter, and services exports growing 30.2%, the overall exports and hence the overall trade deficit and the CAD remained under tremendous pressure.

Going ahead it is not too clear whether the negative impact of weak global demand on exports will outweigh the softening of imports related to the correction in commodity prices. However, the spike in the CAD is likely to have a series of repercussions on the Indian rupee value as well as on the sovereign ratings and the sovereign outlook. For now, it may not be serious, but it is time the government treads a lot more carefully.