India Registered A Current Account Surplus Last Quarter But Not Entirely Because Of Reasons To Celebrate   

India’s current account balance data was released yesterday (30 September), and it indicated what was being forecasted. That is, our current account was in a surplus — and that too, a surplus of $19.8 billion in the first quarter (Q1) of financial year (FY) 2020-21 which is approximately 3.9 per cent of our gross domestic product (GDP).

This was the second successive quarter in a surplus (the Q4 FY 2019-20 current account surplus was $0.6 billion — or 1 per cent of GDP).

There are several reasons behind this improvement in the current account balance — and not all of them are positives. One of the major reasons behind an improvement in our current account balance is the reduction in global crude prices.

This is one of the major reasons behind the steep decline in the value of our imports — more so, during the last quarter of the previous financial year.

The other major reason behind the surplus has to do with the Covid-19 pandemic which has reduced the value of imports far more than the reduction in the value of exports. As a mater of fact, our exports are nearly back at the normal levels even though there was a slight dip in the month of August compared to the month of July.

So, the question is regarding what does this surplus mean for the Indian economy, and the answer lies in macroeconomic identities. That is, a significant reduction in imports imply a reduction in the domestic demand, which could be an outcome of the general lockdown, an income stress, or a combination of both.

It is highly likely to be a combination of both as lockdown was bound to disrupt consumption activity, especially of non-essential items.

Moreover, the income shock due to the pandemic is bound to be reflected in the lower value of imports. Lower domestic demand implies a lower demand for goods and services, irrespective of whether they are domestic or foreign; thus, a reduction in imports is very likely.

So, does this mean that we will go back to a current account deficit once economic activity return?

As economic activity normalises and growth recovers, we will see an increase in the value of imports. This happens as people would now demand for goods and services — some of which will not be produced in India and thus will have to be imported.

Moreover, oil prices too will begin to recover as global growth recovers, which will push the value of our imports.

Therefore, we will yet again be back to a current account deficit.

However, there is a possibility that the current account deficit would be structurally lower than the one before due to the recent push towards promoting domestic manufacturing activity.

But will our current account remain in surplus for the present year?

There is a possibility that the current account may remain in a surplus for the entire year as the world experiences an economic contraction across all regions.

Consequently, with oil in excess supply in the international markets, oil prices will largely remain muted for the remaining few months.

Moreover, with global growth recovering at a faster pace than our domestic recovery, we should see our exports improve a lot quicker than our imports.

While we may experience a structurally lower level of current account deficit going forward due to both lower levels of oil prices and a push for greater manufacturing activity domestically, a current account surplus may not always be positive.