Current account returns to negative zone

by Manasi Swamy

India’s current account slipped back into deficit during October-December 2020 after a gap of three quarters. The deficit was of the order of USD 1.7 billion, or 0.2 per cent of nominal GDP. It reflects the Indian economy’s return to normalcy from the shock of Covid-19 induced lockdown.

India witnessed a small current account surplus of USD 584.4 million in the March 2020 quarter. The surplus increased to a record high of USD 19 billion in the June 2020 quarter and remained elevated at USD 15.1 billion in the September 2020 quarter, before evaporating in the December 2020 quarter. The consecutive current account surpluses largely emanated from a decline in goods trade deficit which narrowed due to shrinkage of domestic demand and disruptions in supply chain caused by the Covid-19 pandemic.

India’s goods exports declined year-on-year by 36.7 per cent in the June 2020 quarter and by 5.5 per cent in the September 2020 quarter. Imports declined by a much steeper 51.2 per cent and 24.4 per cent, respectively. But, the fall in imports alleviated substantially to 4.7 per cent in the December 2020 quarter as pent-up demand got unleashed and the festive season spurred additional spending. Exports, on the other hand, reported only a mild improvement with their y-o-y contraction shrinking to 4.9 per cent in the December 2020 quarter. Goods trade deficit that had shrunk from USD 35 billion in the March 2020 quarter to USD 10.8 billion and USD 14.8 billion in the June 2020 quarter and the September 2020 quarter, expanded once again to USD 34.5 billion in the December 2020 quarter. Preliminary estimates of exports and imports released by the Ministry of Commerce suggest further widening of trade deficit to USD 41.5 billion in the March 2021 quarter.

India’s services exports earnings have shown good resilience to the pandemic. Net dollar earnings from exports of services rose y-o-y by two per cent in the June 2020 quarter and remained flat in the September 2020 quarter. In the December 2020 quarter, services export earnings rose by 7.9 per cent. This was owing to the dominance of computer software industry in India’s services exports. The computer software industry is relatively less vulnerable to disruptions like Covid-19 as a part of its revenues come from maintenance projects. Besides, the pandemic has also created fresh demand for remote working solutions from corporates across the globe.

Personal transfers between resident and non-resident households of India got impacted by the pandemic in the first two quarters of 2020-21. These fell y-o-y by 5.5 per cent in the June 2020 quarter and by 7.8 per cent in the September 2020 quarter. In the December 2020 quarter, personal transfers improved, rising y-o-y by 1.9 per cent to USD 19.3 billion. However, it needs to be noted that the improvement came because of redemptions or local withdrawals of NRI deposits. Fresh remittances by Indians working abroad remained subdued. These are current transfers. Investments by NRI’s in bank deposits, which are capital transfers improved to USD 3.3 billion in the December 2020 quarter from around USD 2 billion in the first two quarters of fiscal 2020-21. Personal transfers account for only 3-4 per cent of personal income in India. They impact household prosperity and consumption more at the regional level than aggregate as a bulk of the remittances received by India flow into the states of Kerala and Punjab.

Multinationals repatriated large amounts of earnings to their home countries amid the pandemic. The first quarter of 2020-21 saw net dollar outflows of 7.6 billion on this account. The outflows increased to touch a record high of USD 9.4 billion in the second quarter and increased further to USD 10 billion in the December 2020 quarter. Quarterly dollar outflows on account of repatriation of earnings had averaged much lower at USD 6.8 billion in 2019-20. The increase repatriation of earnings is a reflection of bumper profits made by multinational companies operating in India, as also their inadvertent response to the increased fund requirement of their parent companies amid the pandemic.

Overseas investors’ faith in India’s long-term growth story remained unshattered amid the Covid-19 pandemic. They pumped in huge amounts of capital in India through direct investment route in the second and the third quarter of 2020-21. The September 2020 quarter witnessed record foreign direct investment (FDI) of USD 24.6 billion and the December 2020 quarter was the second best to it at USD 17 billion. On the flip side, a bulk of this FDI went into acquisition of shares, particularly purchase of Reliance’s stake in the Jio platform. Announcement of fresh capacity expansion plans in India by foreign companies fell sharply in 2020-21. These touched a near two-decade low of Rs.114 billion, according to the data compiled by CMIE’s CapEx service. Channelisation of FDI in productive capacity creation leads to higher domestic output in the future, whereas FDI that comes into the form of acquisitions only increases overseas claim on future profits.

Financial institutions and private corporates tried to reduce their exposure to overseas debt after putting their expansion plans on the back-burner. Repayments of external commercial borrowings (ECBs) exceeded fresh disbursals, resulting into net dollar outflow of USD 15 billion in the September 2020 quarter and USD 11.5 billion in the December 2020 quarter.

Foreign portfolio investment (FPI) interest into India returned after a short exodus in March-April 2020. Global liquidity went into huge surplus owing to stimulus packages pushed out by various governments to battle economic woes arising out of the Covid-19 pandemic. The surplus liquidity started finding its way into emerging markets and India turned into their favourite destination to park billions of dollars. FPI’s pumped in USD 7.7 billion into the Indian capital market in the September 2020 quarter. The inflows increased further to touch an all-time high of USD 21.7 billion in the December 2020 quarter as the country started showing signs of a speedy economic recovery. The interest was primarily in equities. FPI investments into sovereign papers remained subdued and corporate debt instruments witnessed outflows of FPI.

India’s stellar performance on the external front amid the Covid-19 pandemic has helped it mitigate its financial risks. The country strengthened its forex exchange assets by USD 83.9 billion in a span of just three quarters ended December 2020. Its forex kitty stagnated in the March 2020 quarter because of widening of trade deficit and thinner financial inflows. Despite this, its forex kitty at end-March 2021 was at a near-record high which places India in a strong position to handle any expansion in trade deficit as the economy recovers further.

References
1. https://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&tabcode=001051004005000000&repnum=18937&frequency=Q&colno=1