Tuesday's Talking Points
Current Account Surplus – Signs of Times to come?
What’s the Point? (A Brief Summary)
Amidst the ever-changing geopolitical environment, India is gaining share in world exports of goods and services. The March 2024 quarter was the first ‘normal’ quarter post 2007 to report a current account surplus. As India targets to become the Office and the Factory to the world, India has seen its exports of goods and services grow at 16% p.a. in USD terms for the past 3 years. In an interesting exercise, the Ministry of Commerce and Industry is setting export targets in FY30 for key sectors such as electronics, textiles, pharmaceuticals, chemicals, agriculture and allied products. Strength in Current Account Balance bodes well for India in the external sector, the Rupee and overall macroeconomic stability.
What has improved our Current Account Deficit numbers?
FY2024 current account deficit was US$ 23 billion, amounting to 0.7% of GDP, lower than 2% in FY23. The March Quarter was the first quarter after 2007 (barring the period during COVID-19 pandemic where imports were impacted), to see a positive current account surplus. A surplus in this quarter was a result of lower deficit in goods trade and expanding surplus on the services side.
Source: Centre for Monitoring Economy (CMIE)
Target setting for FY30 Exports
Across segments, various initiatives are being discussed to reach targets set for FY30. For supporting its mission of Aatmanirbhar Bharat, the Government has stepped up its capex and announced a slew of supportive policies like conducive tax environment, Production-Linked Incentives (PLI) for different sectors to provide impetus to diversification of supply chain operations by multinational companies to India.
Source: India Brand Equity Foundation (IBEF) set up by Ministry of Commerce and Industry, Morgan Stanley
Rise in Services Exports supporting the Growth in Overall Exports
The recent rise in Services Exports has been driven by continued rise in spends on Information Technology (IT). In the last 3 years, the setup of captive centres, also known as Global Capability Centres (GCC) have seen significant increase, and has resulted in other business services exports rising to 2.5% of GDP for FY24.
As per EY’s latest “Future of GCCs in India - a vision 2030” report, it is estimated that the domestic GCC market size will reach US$110 billion by the year 2030, with 2,400 GCCs. While there are fears of a global economic slowdown, India continues to have, amongst other factors, the availability of large talent pool, cost advantage, and acceptability of remote working. All these factors bode well for the growth of the sector overall, and could help India emerge as the world's technology and services hub, and potentially giving a boost to India’s overall exports.
Conclusion
As per RBI survey of professional forecasters, Current Account Deficit for FY25 is forecast at 1% of GDP, slightly higher than the FY24 actual of 0.7% of GDP but lower than historical averages of ~2%. While the trajectory of trade deficit remains uncertain due to various factors such as volatile commodity prices, geopolitical risk, etc., the Government continues to focus on boosting India’s exports. Initiatives like PLI, PM Gati Shakti Mission and others, are helping manufacturing companies to set up their manufacturing units, and raising exports potential while also reducing imports. Such concerted efforts in other sectors are likely to support the growth of economy.
With potential positive inflows in Indian government bonds over the course of FY25 on account of inclusion in global bond indices, probable improvement in foreign investment post-election policy continuity, the capital account also has significant tailwinds. This bodes well for INR stability and overall macroeconomic stability for India.
Sources: PIB, CMIE, Ministry of Commerce, RBI, and other publicly available information.
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