For the March 2020 quarter, the Indian economy reported a current account surplus for the first time in 13 years. The last time India had reported a CAS was in the March 2007 quarter which is why this assumes added significance.
Lower trade deficit
If you look at the full financial year FY20 the trade deficit was nearly 15% lower than the previous year. Of course, this can be partly attributed to weak oil prices and partly to the lag effect of the COVID-19 pandemic. But trade deficit compressed from a high of $15 billion per month to as low as $6 billion per month. The COVID shock also led to an overall compression in world trade and that was also responsible for the sharp fall in the trade deficit. This was one of the key reasons that accounted for India shifting to a current account surplus.
Invisibles played a big part
Invisibles are the non-merchandise flow items. The big boost came from the sharp spike in software service exports and fees charged. This was almost to the tune of $17 billion and was largely the reason for negating the impact of the trade deficit. Secondly, remittances from abroad continued to be robust with most NRIs continue to prefer the higher yields available in India. Despite the global slowdown in growth, NRI remittances continued to remain robust and that was a key reason for the surplus.
Supply chain could hit exports
While it is good to celebrate the CAS, it must be remembered that the lag effect of COVID-19 is likely to hit the economy in two ways. Firstly, it means that labor will still be hard to come by and materials and logistics will still pose a challenge. These will be instrumental in putting pressure on domestic growth impulses. Secondly, India still depends on imports to keep its supply chains stocked up and that is not going to change in a hurry. Suppliers may vary but the dependence would still continue. In addition, the logistic constraints will also mean that the export growth will not be able to keep pace with import growth and that will be instrumental in widening the merchandise trade deficit.
Oil prices could be slippery
The real joker in the pack for the Indian economy will be the trend in oil prices. As global demand and economic activity pick up in the right earnest, the first big impact could be on the oil import bill and the oil-induced inflation. The real challenge could come from the way the government has taxed diesel and petrol to the hilt. If crude prices go up, the only option for the government will be to directly pass on the costs in the form of price hikes in petrol and diesel. Local capacity hardly fills up 10-15% of oil needs and imports are inevitable. Higher oil prices would mean a return to trade and current account deficits for India!