Economic Survey 2023: India's CAD within manageable limits

The Economic Survey FY 2022-23, released by the Ministry of Finance today, states the current account deficit (CAD) is expected to be within sustainable limits during the remainder of FY23 due to an ease in crude oil prices. The CAD stands for the measurement of any country’s trade when the value of the goods and services imported exceeds the value of goods and services exported.  

"While recognising the potential adverse developments, it is important to take cognisance of innate buffers to India’s external sector. India's export of services, primarily contributed by software, business, and travel services, while remaining robust during the year so far, embodies a greater degree of resilience. India is cementing its position as the top remittance receiver in the world, with inward remittances projected to be at record levels during 2022," the survey says.

"Accordingly, a large surplus under services and remittances would cushion the widening trade deficit. Consolidating an increasing share of non-debt flows in financing CAD over the years, net FDI flows remained robust during the current year, while the net FPI inflows turned positive in recent months. Thus, the CAD would be within manageable limits and eminently financeable," it adds. 

According to the Balance of Payments data by the Reserve Bank of India, India’s CAD swelled to an all-time high of $36.4 billion, which is around 4.4% of the country's GDP, in Q2 FY 2022-23, double from $18.2 billion during the previous quarter and way higher than $9.7 billion a year ago.

The survey says the widening of the current account deficit (CAD) in the second quarter of FY23 was mainly on account of a higher merchandise trade deficit of $83.5 billion and an increase in net investment income outgo. For the period April-September 2022 (H1FY23), India recorded a CAD of 3.3% of GDP on the back of an increase in the merchandise trade deficit, as compared with 0.2% in H1FY22.

"Overall, the adverse global economic situation placed India’s Balance of Payments (BoP) under pressure in 2022. While the impact of a sharp rise in oil prices was discernible in the widening of the CAD, policy tightening by the US Fed and the strengthening of the US dollar led to FPI outflows. As a result, as the net financial inflows fell short of the CAD, there was a depletion of foreign exchange reserves on a BoP basis to the tune of US$ 25.8 billion in H1FY23 in contrast to an accretion of US$ 63.1 billion in H1FY22. But huge valuation losses (US$ 48.9 billion) contributed to the net depletion of US$ 74.6 billion of reserves in nominal terms during the period," the survey says. 

Meanwhile, the country's forex reserves as of the end of December 2022 stood at $562.72 billion, accounting for 9.3 months of imports, and the ratio of external debt to GDP is at a comfortable level of 19.2% as of end-September 2022. As of end-November 2022, India was the sixth largest foreign exchange reserves holder in the world according to data compiled by the IMF.