CAD to touch 5.6% of GDP in Q2 FY23

by Manasi Swamy

India’s current account deficit (CAD) is set to climb to 5.6 per cent of GDP in the quarter ending September 2022. This would be the highest CAD-to-GDP ratio in a decade. CAD as a proportion of GDP was last seen higher than this in the quarter ended December 2012.

In absolute terms, the country is expected to record a CAD of USD 56.3 billion during July-September 2022. This single quarter CAD would be way higher than the full year CAD recorded in each of the past three years. The widening of CAD is solely led by an expansion in merchandise trade deficit.

Indian economy has been witnessing a rapid widening of merchandise trade deficit for the past one year. On customs basis, merchandise trade deficit expanded from USD 31.5 billion in the June 2021 quarter to 44.7 billion in the September 2021 quarter and further up to USD 60.1 billion in the December 2021 quarter. The deficit showed a seasonal narrowing in the March 2022 quarter, alleviating to USD 54.4 billion. But it widened once again in the June 2022 quarter to touch a fresh high of USD 68.7 billion.

Now, within the first two months of the September 2022 quarter, merchandise trade deficit has swelled to USD 55.8 billion. We estimate the deficit to moderate a bit in the month of September due to softening of oil prices globally. Yet, it will aggregate at USD 83 billion in the September 2022 quarter. This will be a fresh quarterly peak.

India’s imports increased exponentially between the April-June quarter of last year and this year from USD 127.1 billion to USD 189.9 billion. The rise was primarily driven by sharp increase in commodity prices globally, particularly energy. IMF’s energy price index, comprising prices of crude oil, natural gas and coal, doubled from 156.2 in the June 2021 quarter to 311.8 in the June 2022 quarter. The three commodities account for a bulk of India’s total imports. In fact, the share of POL and coal in India’s total import bill increased rapidly from 29 per cent in the June 2021 quarter to 41 per cent in the June 2022 quarter. Besides, imports of most commodities witnessed volume growth too as domestic demand recovered with waning impact of the Covid-19 pandemic. Imports remained elevated at USD 128.2 during July-August 2022.

India’s merchandise exports grew between the June 2021 quarter and the June 2022 quarter from USD 95.6 billion to 121.1 billion. But these could not keep pace with the rapid increase in imports. Consequently, trade deficit widened. Exports moderated in the last two months to USD 38.4 billion in July 2022 and USD 33.9 billion in August 2022 due to global slowdown and imposition of exports duties on shipments of petroleum fuels and steel. Demand for exports of textile, readymade garments, gems & jewellery and a few other commodities weakened from the western countries.

We expect the falling trend in exports to continue into the second half of 2022-23 as global economy continues to slow down. United States is standing on the brink of recession. Threats of recession are looming over the Eurozone too. And the growth of the Chinese economy is slowing rapidly. The US, Europe and China account for half of India’s exports. Besides, the government has been imposing duties on exports of a few commodities to improve their domestic availability and arrest price rise. On September 8, 2022, it slapped 20 per cent duty on exports of some varieties of non-basmati rice and has banned exports of broken rice completely. Non-basmati rice had contributed 1.5 per cent to India’s total exports last year. Exports of wheat and sugar have already been banned. More restrictions on agro-commodity exports cannot be ruled out if food inflation continues to rise. Besides, the duties imposed on exports of steel and petroleum fuels in May and July this year stay.

Merchandise imports too are expected to decelerate in the second half as commodity prices ease and pent-up demand in India wanes, particularly post festive season. Prices of crude oil have softened in the last three months after peaking in June 2022. From USD 121.3 per barrel on June 9, 2022, the price of Indian basket of crude oil fell to USD 93.8 per barrel as of September 13, 2022. Going forward, oil prices may show some volatility, but are expected to average well below USD 100 per barrel in the second half of 2022-23. This will translate into some easing of India’s oil import bill.

We estimate India’s merchandise trade deficit to narrow from its peak of USD 83 billion in the September 2022 quarter to USD 74 billion in the December 2022 quarter and further down to USD 66 billion in the March 2023 quarter.

Exports of services and remittances from abroad are two large sources of dollar earnings for India. Both are likely to stagnate at their current levels in the second half of 2022-23.

The near-recession conditions in the US and Europe are likely to affect software export earnings at the margin. Reportedly, large Indian information technology (IT) companies like TCS, Infosys, Wipro and HCL Technologies are facing unit realisation challenges of their software exports. A bulk of India’s services exports comprise of software exports. We therefore expect exports of services to stagnate in the last two quarters of 2022-23 at their September 2022 quarter level, estimated at USD 28.5 billion.

Secondary income, comprising remittances from abroad, increased from USD 19 billion in the June 2021 quarter to USD 21.2 billion in the March 2022 quarter. These levels of secondary income are likely to sustain through 2022-23. A sharp depreciation of the rupee against the US dollar is likely to have encouraged Indians staying abroad to remit more dollars to India. Going forward, remittances from the US and UK may weaken, but those from the Gulf countries are likely to strengthen. According to the Reserve Bank of India (RBI), remittances from the Gulf countries had slowed down last year due to strong presence of Indian diaspora in informal sector, which was hit the most during the pandemic. These are likely to recover in the current fiscal.

Going forward, India’s current account balance is expected to mimic the movement of trade balance as services exports and remittances from abroad remain range-bound. After a rapid increase from 1.5 per cent in the March 2022 quarter to 3.6 per cent in the June 2022 quarter and 5.6 per cent in the September 2022 quarter, we project CAD as a proportion of GDP to ease to 4.1 per cent in the December 2022 quarter and 3 per cent in the March 2023 quarter.

The CAD-to-GDP ratio for the full fiscal 2022-23 is expected to widen to a decadal high of 4.1 per cent from 1.2 per cent in 2021-22.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
6.5 -2.7
Consumer Sentiments Index
Base September-December 2015
76.2 -0.5
Consumer Expectations Index
Base September-December 2015
74.6 0.0
Current Economic Conditions Index
Base September-December 2015
78.7 -1.1
Quarterly CapEx Aggregates
(Rs.trillion) Sep 21 Dec 21 Mar 22 Jun 22
New projects 3.41 4.02 8.19 4.34
Completed projects 1.29 2.77 1.29 1.18
Stalled projects 0.28 0.08 0.43 0.27
Revived projects 0.39 1.98 0.32 0.28
Implementation stalled projects 0.26 0.66 0.09 0.29
Updated on: 26 Sep 2022 8:28PM
Quarterly Financials of Listed Companies
(% change) Sep 21 Dec 21 Mar 22 Jun 22
All listed Companies
 Income 27.5 23.4 20.8 40.3
 Expenses 26.7 21.3 19.9 41.7
 Net profit 55.7 35.4 30.4 20.5
 PAT margin (%) 9.6 9.0 8.9 7.3
 Count of Cos. 4,703 4,750 4,651 4,568
Non-financial Companies
 Income 35.7 29.2 24.9 50.3
 Expenses 36.1 28.8 25.8 53.4
 Net profit 58.1 19.2 10.1 7.6
 PAT margin (%) 8.7 7.5 7.7 5.8
 Net fixed assets 4.9 2.1
 Current assets 11.1 15.1
 Current liabilities 0.9 11.8
 Borrowings 12.2 3.4
 Reserves & surplus 12.6 11.2
 Count of Cos. 3,394 3,439 3,375 3,346
Numbers are net of P&E
Updated on: 26 Sep 2022 8:28PM
Annual Financials of All Companies
(% change) FY20 FY21 FY22
All Companies
 Income 0.6 -1.1 25.6
 Expenses 0.4 -3.3 23.9
 Net profit -6.1 72.0 63.6
 PAT margin (%) 2.0 4.3 8.9
 Assets 9.0 9.8 9.7
 Net worth 4.8 11.8 14.3
 RONW (%) 3.3 6.7 12.7
 Count of Cos. 32,686 30,979 5,135
Non-financial Companies
 Income -1.1 -2.1 32.3
 Expenses -0.9 -4.0 31.7
 Net profit -22.4 59.3 59.7
 PAT margin (%) 2.2 3.9 7.8
 Net fixed assets 11.4 2.3 2.0
 Net worth 2.1 10.3 14.7
 RONW (%) 4.6 7.5 14.1
 Debt / Equity (times) 1.2 1.0 0.7
 Interest cover (times) 1.9 2.4 4.9
 Net working capital cycle (days) 82 87 52
 Count of Cos. 25,868 24,352 3,741
Numbers are net of P&E
Updated on: 20 Sep 2022 10:23AM