India's CAD may have breached 3% of GDP in Q1 on surge in imports

Analysts peg full-year figure at $120 bn, but say it will be lower as proportion of GDP than FY13 levels

India’s current account deficit (CAD) is expected to more than double sequentially to over $30 billion in the first quarter of financial year 2022-23 (Q1FY23) to rise above 3 per cent of gross domestic product (GDP) from $13.4 billion, or 1.5 per cent of GDP, in the previous quarter.

The gap between exports and imports has widened primarily because of the sharp rise in commodity prices in Q1 as a result of the Russia-Ukraine war and supply chain disruptions. The Reserve Bank of India (RBI) is expected to release data on the current account balance and balance of payments by Friday.

There has been a sea change on the trade balance front in the past 12 months. The current account balance was at a surplus of $6.5 billion in Q1FY22, a period marked by the adverse impact of the second wave of the Covid-19 pandemic on economic activity.

Imports surge

The surge in imports witnessed in Q1 has continued, which could push the CAD to an even higher level in Q2FY23.

According to ICRA estimates, India’s CAD may have crossed $30 billion in Q1 (3.6 per cent of GDP), the equivalent of 80 per cent of the full-year CAD of FY22. The deficit is likely to be similar to the levels seen during the taper tantrum episode in Q3FY13, when it was $31.9 billion.

Concurring with ICRA’s estimates, Madhavankutty G, group chief economist of Manappuram Finance, said the CAD for Q1 may be between $30 billion and $35 billion. This is because oil imports almost doubled from $31 billion in Q1FY22 to $59 billion in Q1FY23, and non-oil imports increased by $35 billion, he said. The rise in non-oil imports indicates a revival of domestic demand.

These pressures have gathered steam in Q2 amid a slowdown in the global economy. The surge in imports witnessed in Q1 has continued even after July, possibly pushing the CAD even higher.

Based on the trends for July and August, ICRA said, the CAD could surge further to an all-time high of $41-43 billion in Q2, which would be a massive 5 per cent of GDP.

Meanwhile, India Ratings highlighted the impact of global headwinds in Q2, saying merchandise exports, which touched a record high of $121.2 billion in Q1, could slow to about $104 billion in Q2, growing by a meagre 1.4 per cent year-on-year (YoY).  

As a result, the CAD could reach an all-time high of $120 billion, or 3.5 per cent of GDP in FY23, much higher than the $38.7 billion seen in FY22, which was 1.2 per cent of GDP. Nevertheless, as a proportion of GDP, the FY23 CAD is expected to be much lower than the levels seen in FY13 of 4.8 per cent, said Aditi Nayar, chief economist of ICRA.

The RBI has maintained that India can sustain the CAD in the 2.5-3 per cent range without getting into an external sector crisis.