India’s current account balance (CAB) recorded a marginal surplus of $0.6 billion in the fourth quarter (Q4) ended March 31, 2020 on the back of higher remittances and foreign direct investment, and external commercial borrowing inflows.
The surplus comes after almost 13 years of deficit in the current account, which measures the inflow and outflow of goods, services, investment incomes and transfer payments.
If the current account is in surplus, then the value of exports is more than that of imports. If the current account is in deficit (current account deficit or CAD) then the value of imports is more than that of exports.
India had recorded a current account deficit of $4.6 billion and $2.6 billion in the year-ago quarter (Q4FY19) and the preceding quarter (Q3FY20), respectively.
In percentage terms, the current account surplus was at 0.1 per cent of GDP in the reporting quarter. The current account deficit was 0.7 per cent of GDP in Q4FY19 and 0.4 per cent of GDP in Q3FY19.
Madan Sabnavis, Chief Economist, CARE Ratings, said: “India typically has a trade deficit. Now, whenever there is a decline in economic activity, imports decline faster than exports. That is why trade deficit contracts. And we normally maintain stable invisible inflows via software earnings and remittances.
“So, any benefit which we get on the trade front automatically gets reflected in the current account, which is turning out to be surplus. The surplus is likely to continue this year.”
Sabnavis said India previously recorded a surplus on current account in the fourth quarter ended March 31, 2007. Then the current account showed a surplus of $4.2 billion.
According to the Reserve Bank of India, the surplus in the current account in Q4FY20 was primarily on account of lower trade deficit at $35 billion ($35.2 billion in the year-ago quarter) and a sharp rise in net invisible receipts at $35.6 billion ($30.6 billion).
Private transfer receipts, mainly representing remittances by Indians employed overseas, increased to $20.6 billion ($17.9 billion).
Net outgo from the primary income account, primarily reflecting net overseas investment income payments, decreased to $4.8 billion from $6.9 billion a year ago.
Foreign investment inflow
Net foreign direct investment at $12 billion was higher than $6.4 billion in the year-ago quarter.
Foreign portfolio investment (FPI) declined by $13.7 billion as against an increase of $9.4 billion in Q4FY19 due to net sales in both in debt and equity markets, the RBI said.
Net inflow on account of external commercial borrowings was higher at $9.4 billion in Q4FY20 as compared with $7.2 billion in the year-ago period.
“Owing to Covid-19-related uncertainty, net inflows under ‘other capital’ surged during the quarter, reflecting inter alia the FPIs’ outstanding balances with custodian banks and pending issuance of shares by FDI companies,” the RBI said.
The CAD narrowed to 0.9 per cent of GDP in 2019-20 from 2.1 per cent in 2018-19 on the back of the trade deficit shrinking to $157.5 billion in 2019-20 from $180.3 billion in 2018-19.
