NEW DELHI: With significant slump in domestic economic activity due to the coronavirus-induced lockdown that has significantly curtailed imports, the finance ministry expects the country’s current account balance to turn surplus in the June quarter of FY21 after a gap of 12 years.
The last time India’s current account turned positive was in the March quarter of 2006-07 at $4.2 billion. However, for the full year, current account was positive for three consecutive years from 2001-02 to 2003-04. India’s CAD narrowed to 0.2% of GDP in December quarter of FY20 from 0.9% during the September quarter on the back of lower trade deficit and rise in net service receipts. Data for the March quarter is expected to be released by end of this month.
“Fortunately, India’s external sector has acquired resilience, manifest in improvement in Balance of Payments (BoP) position despite being challenged by net FPI outflows for some time. A comfortable BoP rests on manageable current account deficit (CAD), prudent external debt and robust availability of foreign exchange reserves adequate to finance more than eleven months of imports,” the finance ministry said in its latest macro-economic report for May.
As a considerable drop in domestic economic activity significantly curtails imports, India’s current account balance may generate a small surplus in the first quarter of 2020-21. India’s CAD is also supported by low levels of external debt servicing, the report said.
SBI Research and Barclays have projected a current account surplus of $19 billion or 0.7% of GDP in FY21. Terming it ‘unwelcome surplus’, Barclays last month said it is an unwelcome development as the surplus will be driven almost entirely by the lockdown of the economy to contain the pandemic outbreak helped by the plunge in crude prices and not by excess exports earnings over imports.
As countries sealed their borders to arrest the spread of the coronavirus and supply chains broke down because of mobility restrictions, India’s merchandise exports during the first two months of the current financial year (April-May) contracted 47.5% while imports fell 54.7% leading to a trade deficit of $9.9 billion against $30.7 billion deficit during the same period a year ago.
Madhavi Arora, lead economist, Edelweiss Securities said she expects FY21 could see CAD improve to 0% as oil imports slump amid sharp fall in oil prices while core import demand also remains bleak.
“We expect exports growth to remain fragile amid demand shock globally which could take time to recover and some spillover of weak global demand may continue in June and September quarters. Import growth is likely to remain sluggish as well amid weak domestic demand and supply disruptions globally,” she said.
“The funding will be contingent on evolving global risk appetite as markets reassess global growth concerns amid covid-led disruptions and other idiosyncrasies. We expect capital account to worsen in FY21 as dollar funding could be a concern in first half of FY21. However, BoP could remain in surplus of ~$32-35 billion helped by lower current account despite weak FPI hot money appetite,” she added.
Despite facing massive sell-offs in the equity market amid fear surrounding covid-19, India’s foreign exchange reserves continued to grow and stood at a lifetime high of $507.6 billion in the week to 12 June helped by a significant jump in foreign currency assets. “Sharp decline in crude oil prices and depressed domestic demand for gold imports may have nullified the impact of FPI flight on reserves,” the finance ministry said.
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