India’s current account deficit (CAD) for the first quarter of FY2024 has expanded to $9.2 billion, a significant increase from the previous quarter’s $1.3 billion (Jan-March, 2023) according to RBI. Several factors contribute to this widening deficit, particularly a pronounced trade imbalance, reduced surplus in net services and a decrease in private transfer receipts.
The trade deficit has notably expanded due to a sharp reduction in India’s merchandise exports, due to sluggish demand from the Western nations and China. While services exports have grown 22.8% in January-March, concerns have arisen about future global demand for software and banking services.
Historically, India has been a net importer, primarily due to substantial energy imports. Additionally, gold imports have surged 38.75% to $4.93 billion in August, due to festival demand and the wedding season.
Despite the current challenges, the CAD is improving from quarter to quarter due to a reduced trade deficit of $ -9.21billion compared to the previous year’s $ -17.96 billion (table 1). The decline in global commodity prices in this financial year has played a crucial role in this positive development.
One of India’s key challenges is the surge in petroleum prices, exacerbated by the OPEC+ group’s decision to cut oil supplies until December, coinciding with the high-demand winter season. India‘s crude import basket reached a staggering US$93 for September supplies. The Brent crude oil price skyrocketed to an annual high of US$100 per barrel, further fuelling concerns.
The implication for the import-dependent Indian economy is inflation. The increased cost of energy trickles down to higher transportation costs, which, in turn, result in elevated prices for essential goods and services. This inflationary pressure affects the common Indian citizen, putting a strain on household budgets. Moreover, they have contributed to the rising trade and current account deficit, which is now a stark reality.
While India grapples with import-related challenges, it is not immune to export difficulties. India has imposed export restrictions, particularly on agricultural products, which have led to lower exports realisation. On top of it, India has a rising agricultural import bill primarily due to ever-burgeoning edible oil and pulses imports. The possible import of wheat from Russia could further stress our forex reserves and pressure the rupee. Additionally, there is subdued demand for India’s labour-intensive manufactured products like gems and jewellery, textiles and apparel, marine products, handicrafts, handlooms and leather products, in international markets resulting in lower inflow of foreign exchange.
Supply chain disruptions have added to India’s economic woes, causing a record rise in the import cost of essential goods including fuel, food, fertilisers, coal and critical minerals. Increased import of edible oil and pulses is driven by low domestic production and global supply chain disruptions caused by alternative uses of edible oil as biofuels, the Russia-Ukraine conflict, and deteriorating diplomatic relations with Canada.
High-interest rates across leading economies, economic recessions and wavering consumer sentiment in countries like China and the US have lowered demand for India’s merchandised exports. India’s gems and jewellery sector has halted the import of rough diamonds for cutting and polishing due to weak demand from major markets like the US, China and the EU. India’s textiles exports are challenged on price by Bangladesh and Vietnam, and pharmaceutical exports are impacted by enhanced regulatory compliance.
The prevailing uncertainty in global financial markets has further complicated India’s economic challenges. The possibility of a US government shutdown, rising bond yields and the flight of foreign capital to the US amid increasing Federal Reserve rates have created a complex economic landscape for India.
With a rising CAD, it is crucial for India to prioritise boosting exports, particularly of merchandise. The CAD in India is often a result of a trade deficit, where imports exceed exports. By focusing on increasing merchandise exports, especially of areas where it has supply side capabilities i.e. textiles, leather, pharma, processed food, marine, handicrafts and handlooms etc., India can work towards narrowing this trade gap, which is a significant contributor to the CAD.
Moreover, merchandised exports generate not only forex earnings, but also helps enhance production and employment opportunities. Accordingly, we should focus on diversifying export destinations which can reduce dependence on specific regions or countries like the EU, North America and China. This can make India’s exports more resilient to global economic fluctuations.
India’s economy is navigating a labyrinth of interconnected challenges, including rising petroleum prices, export restrictions, global economic uncertainties and supply chain disruptions. These factors have led to low exports, a higher import bill, a stressed current account and pressures on the Indian rupee. Addressing these challenges requires a multifaceted approach encompassing domestic policy reforms, diversification of export markets and enhancing economic resilience to global shocks. India’s ability to overcome these hurdles will be critical in ensuring continued economic growth and stability in an ever-evolving global landscape.
Ram Singh is a professor, IIFT, New Delhi. Views are personal.
This piece was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been updated and republished here. To subscribe to The India Cable, click here.