Widening Deficit
Economists see India FY25 CAD rising to 1% on moderate services exports
This story was originally published at 21:38 IST on 16 August 2024
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By Sourabh Kumar
MUMBAI – Economists see India's current account deficit rising to about 1.0% of the GDP in 2024-25 (Apr-Mar) from 0.7% in the last financial year, mainly due to moderating service exports growth and strong imports.
The current account deficit in 2024-25 is seen in the range of 0.8-1.3% of GDP, according to reports from nine banks and brokerage firms.
"With net services exports remaining steady around $13.6 bln, we see the current account deficit at $30 bln (0.8% of GDP) in 2024-25," ICICI Bank said in a report. The services trade surplus rose to $13.80 bln in June from $13.02 bln the previous month, according to the Reserve Bank of India data.
In July, India's merchandise trade deficit widened to $23.50 bln from $19.00 bln a year ago because of a rise in imports and a decline in exports. Goods exports fell 1.5% on year to $33.98 bln last month, while imports grew 7.5% to $57.48 bln.
While the growth rate in services exports is expected to slow down, even a modest growth is expected to keep the current account deficit under control, economists said. "Even if services do not see a significant growth, a mid-single digit growth is sufficient to keep CAD (current account deficit) contained," Equirus Securities said in its report.
On other hand, a recovery in domestic consumption is expected to drive imports higher, thus putting pressure on the current account deficit, economists said. "This (higher current account deficit this year) would likely be driven by price as well as volume effects, with recovery in consumption leading to higher imports," Barclays said in a report.
"The trajectory of exports has been very uneven since the start of the year, and will likely weigh on India's trade deficit," Barclays said.
The cut in customs duties on precious metals in the Union Budget for 2024-25 will also lead to higher imports, economists said. In the budget, basic customs duty on gold and silver were reduced to 6% from 10?rlier. For platinum, the basic customs duty was slashed to 5%.
"This (lower custom duties) could result in a minor increase in the gems and jewellery trade deficit in the coming months," QuantEco Research said in its report, adding that slashing customs duties on certain electronic products could also give an upward push to imports.
India's import cover has also improved to 11.7 month from 11.4 months earlier, Equirus Securities said. India's foreign exchange reserves were $670.12 bln as of Aug 9.
Reserve Bank of India Governor Shaktikanta Das has time and again highlighted that higher reserves provide cushion to meet any external financial obligations. On Aug 8, Das also said that the current account deficit is expected to remain manageable in 2024-25.
Even as the current account deficit is expected to rise, it is likely to be comfortably financed, economists said. "This is likely to be comfortably financed with a financial account surplus of $93 bln, with more stable sources of external financing coming from bond index inflows," Barclays said. In the last financial year, there was a net accretion of $63.7 bln to the foreign exchange reserves on a balance of payments basis.
Following are the estimates for 2024-25 current account deficit based on inputs from nine organisations:
| Organisation | FY25 CAD Estimate (% of GDP) |
| ICICI Bank | 0.80% |
| Barclays | 1.10% |
| Equirus Securities | 1.30% |
| Kotak Mahindra Bank | 1.10% |
| Nomura | 1.10% |
| Emkay Global Financial Services | 1.15% |
| IDFC FIRST Bank | 1.30% |
| QuantEco Research | 0.90% |
| HDFC Bank | 1.20% |
End
US$1 = 83.94 rupees
Edited by Akul Nishant Akhoury
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