India turned current account surplus: What to read from it?

India registered a current account surplus of USD 0.6 billion for Q4FY20, which is 0.1 percent of the country’s GDP. In Q4FY19, country registered a current account deficit of USD 4.6 billion. Current account measures the inflow and outflow of goods, services, investment income and transfer payment.

The narrowing down of trade deficit (difference between the merchandise exports and imports) played the major role in pushing the country to a current account surplus. In Q4FY20, India’s trade deficit narrowed to USD 34.8 billion.  It could be attributed to the falling crude oil prices and the slowing demand in the domestic economy. The disagreement among the OPEC members, and the ensuing price war, followed by the slump in global demand due to Covid-19 pandemic pushed crude oil prices to historic low levels. In FY20, India imported USD 131 billion worth of petroleum and crude products (POL). The falling crude prices helped in reducing India’s import bill.

Similarly, even before the Covid-19 pandemic, Indian economy was passing through a phase of economic slowdown. GDP growth rate for FY20 stood at 4.2 percent, lowest in the last 11 years. Private Final Consumption Expenditure (PFCE) measuring consumption demand in the economy registered a growth rate of 5.3 percent in FY20. The slowing consumption is reflected in the declining level of imports. In Q4FY20 imports registered a negative growth rate of 9.9 percent (YoY), compared to -0.54 percent in Q4FY19. During the same period, exports registered a growth rate of -13 percent and 6.3 percent, respectively.

The declining trend in imports is likely to continue in the coming quarters also. For instance, in Q1FY21, imports contracted by 53.3 percent, whereas exports contracted by 36.7 percent. The Covid-19 induced economic damage has aggravated the situation in India with further fall in consumption demand. Consumption being the backbone of India’s growth story, falling demand can have ripple effects on the economy. IMF forecasts India’s GDP to contract by 4.5 percent in 2020. Similarly, slump in the global demand could adversely affect India’s export sector. Another major component that need to be looked into is remittances to India. According to World Bank, remittances to India are projected to fall by 23 percent to USD 64 billion in 2020, against the growth rate of 5.5 percent in 2019. Thus, in the present scenario, a current account surplus comes with a sign of caution than relief.