India’s current account balance recorded a surplus of $558 million in the January-March quarter of 2020, first time in 51 quarters. The last time India’s current account balance turned positive was in 2007, a rare occurrence, indeed. In fact, some economists even predict that the country might report current account surplus in 2020-21.
Is this good news for the economy, which has been on a downward slope since the past couple of years? Well, this may come across as positive news, but economists say there is nothing to rejoice as they attribute this largely to lower domestic demand and fall in crude oil prices.
The marginal surplus that the current account in the fourth quarter showed was largely because of drop in net imports of goods. Net imports of goods showed a consistent decline from $46.77 billion in the first quarter to $35 billion in the fourth quarter, helped by lower consumption demand and falling crude oil prices. Aside from falling import bill, exports of services and foreign remittances managed to hold on to their levels in the earlier quarters. These factors largely helped India post a marginal current account surplus of $558 million, or just around $0.6 billion.
Aditi Nayar, Principal Economist, ICRA, says that it (the surplus) is significant only because the current account balance has gone into surplus after 51 quarters.
“The current account balance recorded a mild surplus of $0.6 billion with secondary income flows holding up despite the fall in crude oil prices and burgeoning economic uncertainty,” she explains. Secondary incomes that Aditi Nayar points to are remittances by expatriates.
Though she cautions against too much optimism from this data as she says there is nothing to rejoice about the current account surplus. Though, she believes the country can report a current account surplus of $20-22 billion in 2020-21 as well.
She says that the commodity prices are by and large low, which reduces the import bill, besides domestic demand is low and there is no gold demand because of high prices and lockdown. She also believes export will recover faster than imports as domestic demand is weak, which will drive the surplus in the current financial year.
In 2019-20, the country posted a current account deficit of $24.6 billion against $57 billion in 2018-19.
Prof Deepanshu Mohan, an economist and associate Professor & director, Centre for New Economics Studies at Jindal School of International Affairs, has similar views. He says this is a one-off surplus and it should not be read beyond the fine prints of what is happening in the global economy.
He says, “Imports are down and trade margins are reflective of a consumption slowdown, which definitely is not a good thing.”
And unlike Aditi Nayar of ICRA, he does not believe the surplus will sustain beyond a quarter because he thinks both high remittances and services exports are not sustainable in the April-June quarter. Remittances would be impacted as labour mobility is getting restricted (due to travel constraints) and services would be negatively affected by the pandemic.