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Informist, Thursday, Dec. 19, 2024

By Sourabh Kumar

MUMBAI – After India's trade deficit hit an all-time high of $37.84 billion in November, economists see the current account deficit widening to about 1.2% of GDP in 2024-25 (Apr-Mar) from 0.7% in the previous financial year. The deficit is expected to be limited by robust services exports, they said.

The current account deficit in FY25 is seen in the range of 1.1-1.6% of GDP, according to the average of the estimates by eight banks and brokerage firms. "Factoring in the latest goods and services trade data, we revise our FY2025 current account deficit estimate to 1.3% of the GDP from 1.2%," Kotak Securities said in a report.

The merchandise trade deficit rose to an all-time high of $37.84 billion in November from $27.14 billion in October and $21.31 billion a year ago. The trade deficit surged last month as imports rose 27.0% to an all-time high of $69.95 billion, while goods exports fell 4.8% on year to $32.11 billion.

A surge in gold imports was the primary reason behind a sharp rise in imports in November. Gold imports hit an all-time high of $14.8 billion last month, compared to $7.1 billion in October. Most economists attribute the increase in gold imports to expectations of a further rise in gold prices globally, and higher imports during the wedding season in India. During winter, the wedding season usually runs from November to mid-December.

"While the festive and wedding related demand explains the current uptick, the overall increase can be attributed to higher international gold prices, along with an increase in demand seen after the excise duty revision earlier this year," ICICI Bank said in a report on Monday. "Thus, we are revising our gold imports estimates for FY25 higher to $63 billion now versus our earlier estimate of $54 billion." In the 2024 Budget, the government had reduced the import duty on gold imports to 6% from 15%.

The jump in gold imports in November has raised many eyebrows, including from within the government. Informist on Wednesday reported that the commerce ministry's Directorate General of Commercial Intelligence and Statistics will undertake a detailed examination of the gold import data for November. 

"On noticing the unusual surge, DGCIS has taken up detailed examination of the gold import data and reconciliation would be done with the data received by CBIC (Central Board of Indirect Taxes and Customs)," Informist reported, citing a commerce ministry official. While some bullion traders have claimed that there has been miscalculation in the gold import data for November, the government is not yet certain of the fact and will confirm this only after a thorough assessment, according to the official.

Discrepancies in data aside, economists said that the recent surge in services exports might prove to be a cushion against a rising merchandise trade deficit, and is likely to prevent the current account deficit from shooting higher. "We take cognisance of the sharp increase in the net services balance over the last few months – for the first eight months net services balance is higher by 15% over the same period last year – and consequently (we) raise our net services exports receivables to $184 billion from earlier estimate at $168 billion," YES Bank said in aa report.

India's services trade surplus was at a record high of $17.09 billion in October, against $16.07 billion the previous month, according to data released by the Reserve Bank of India on Nov. 29.

BALANCE OF PAYMENTS

Emkay Global Financial Services Chief Economist Madhavi Arora does not see much hope for foreign fund inflows into the domestic equities market. "With capital flows in equities likely turning negative in FY25, while J.P. Morgan index led debt flows remain healthy, the balance of payments could move to a mild deficit," Arora said in a report. Kotak Securities forecast the balance of payments in FY25 to be in a deficit of $12 billion.

"The full year FY25 balance of payments balance is likely to remain a mild negative, assuming a surplus in Jan-Mar," IDFC FIRST Bank said in a report. "The combination of dollar strength and balance of payment outflows has maintained depreciation pressures on the rupee." IDFC FIRST Bank sees the Indian currency falling to 85.50 a dollar by March-end. The rupee fell below the psychologically important level of 85 a dollar on Thursday due to the dollar index rising to an over two-year-high after the US Federal Open Market Committee hinted at a slower pace of cutting rates in 2025. The Indian currency hit a lifetime low of 85.07 a dollar on Thursday.

Following are the estimates for India's current account deficit in FY25 based on inputs from eight organisations:

End

US$1 = INR 85.0600

Edited by Avishek Dutta

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