India's First Current Account Surplus In 10 Quarters — Is It Necessarily Good News Though?

India recorded a current account surplus of $5.7 billion, or 0.6 per cent of gross domestic product (GDP), in the fourth quarter of the fiscal year 2023-24, as reported by the Reserve Bank of India on 24 June.

This is for the first time in 10 quarters that the current account balance has recorded a surplus.

For the financial year (FY) 2024, India’s current account balance recorded a deficit of $8.7 billion (1 per cent of GDP) in the third quarter, $8.3 billion (1 per cent of GDP) in second quarter and $9.2 billion (1.1 per cent of GDP) in the first quarter.

The deficit stood at $1.3 billion or 0.2 per cent of GDP in the same quarter a year earlier.

For the full fiscal year, the deficit more-than-halved to a seven-year low of $23.2 billion or 0.7 per cent of the GDP, from $67 billion, or 2 per cent of GDP in FY23.

The “current account” of balance of payments comprises the transactions between residents and non-residents in terms of goods, services and incomes.

These transactions cover exports of gems and jewellery, imports of oil and gold, expenditures by Indian tourists abroad, software service exports, and other service-related transactions. The current account also includes investment income payments and remittances from Indians living abroad.

A deficit in current account always reflects in an increase in net financial claims of foreigners, resulting in increased net capital flows or depletion of foreign exchange reserves.

India last posted a current account surplus in April-June 2021 and for the entire fiscal year 2021, but those were years of GDP contraction when Indian industry could not absorb imports.

This year, however, the current account surplus for January-March 2024 came on the back of a lower merchandise trade deficit coupled with India's new found niche in services exports and remittances from the Indian diaspora.

The surplus in Q4 FY2024, after a 10-quarter gap, was primarily due to the merchandise trade deficit narrowing to a 10-quarter low of $50.9 billion from $69.9 billion in Q3 FY2024.

Additionally, services exports grew by 4.1 percent year-on-year in the fourth quarter, bolstered by rising exports of software, travel, and business services. Net services receipts were $42.7 billion, higher than the previous $39.1 billion, helping swing the current account into surplus.

The other big triumph is the increase in remittances from Indians working overseas, which grew by 11.9 per cent to $32 billion in the March quarter, significantly boosting the current account.

However, there is a concerning aspect: net foreign direct investment in FY24 fell to $9.8 billion, a third of the $28 billion recorded in FY23.

A current account surplus indicates that the inflow of foreign exchange exceeds the outflow, leading to an increase in reserves. This is essential for maintaining financial and external sector stability.

However, in the present context, the improvement in our current account is primarily due to reduced demand for imports, reflecting subdued domestic demand. It is crucial to recognise this increase as a potential indicator of economic weakness and to implement supportive policy measures accordingly.

Thus, while a current account surplus may be a welcome change from a persistently high current account deficit, it is essential to monitor the evolution of individual components of the current account balance and to assess the quality and sustainability of such a reduction.