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India’s current account deficit widened considerably to a seven-quarter high of $8.1 billion (minus 1 per cent of gross domestic product) in the fourth quarter (Q4) of fiscal 2020-21 from the revised $2.2 billion (minus 0.3 per cent of GDP) in Q3 on account of the normalisation in import demand as well as a surge in gold imports, even as the exports recorded a robust increase in March 2021, according to rating agency ICRA.
The wider current account deficit in Q4 FY2021 relative to Q3 was driven by the deepening of the merchandise trade deficit (to $41.7 billion from $34.6 billion), followed by a mild decline in the secondary income inflows (to $18.9 billion from $19.3 billion respectively), the Moody’s Investor Service company said in its July 2021 External Sector Outlook.
While the inflows in net services rose marginally to $23.5 billion in Q4 FY2021 from $23.2 billion in Q3, the outflow of the primary income narrowed to $8.7 billion from $10.1 billion respectively.
Relative to the marginal surplus of $0.6 billion in Q4 FY2020, the turnaround in the current account to a deficit in Q4 FY2021 was led by the deeper deficit in the merchandise trade account (to $41.7 billion in Q4 FY2021 from $35.0 billion in Q4 FY2020) and the rise in primary income outflows (to $8.7 billion from $4.8 billion).
In the financial account, there was a sharp turnaround in foreign portfolio investors (FPI) flows to a net inflow of $7.3 billion in Q4 FY2021, after having recorded the record-high outflow of $13.7 billion in Q4 FY2020, following the emergence of first wave of COVID-19 in India in March 2020.
After a gap of 16 years, India’s current account balance recorded a surplus in FY2021 of $24 billion (plus 0.9 per cent of GDP). This stood in contrast to the deficit of a similar magnitude of $24.5 billion (minus 0.9 per cent of GDP) in FY2020, led primarily by a compression in the merchandise trade deficit to $102.2 billion from $157.5 billion respectively, reflecting the moderation in domestic demand as well as the collapse in prices of various commodities in the first half of FY2021.
With the widening state level restrictions shrinking the domestic demand for fuels and gold in May 2021, ICRA expects he current account to revert to a small, transient surplus in Q1 FY2022.
ICRA expects merchandise exports and imports to rise by around 23 per cent and 32 per cent respectively in FY2022 to $360-365 billion and $525-530 billion. As a result, the merchandise trade deficit is expected to widen to $165-170 billion in FY2022.
Overall, ICRA expects India’s current account balance to revert to a deficit of around $23-28 billion or around 0.8 per cent of GDP in FY2022 from the surplus of $24 billion (minus 0.9 per cent of GDP) in FY2021.
Fibre2Fashion News Desk (DS)
India's current account deficit widened considerably to a seven-quarter high of $8.1 billion in the fourth quarter (Q4) of fiscal 2020-21 from the revised $2.2 billion in Q3 on account of the normalisation in import demand as well as a surge in gold imports, even as the exports recorded a robust increase in March 2021, according to rating agency ICRA.