Import slide takes current

account closer to a surplus

CRISIL Economy First Cut Balance of
Payments
September 2016

Overview
Indias current account deficit (CAD) came in at a record low $277 million (or 0.1% of GDP) in the first quarter of this
fiscal (Q1FY17), down from $6.1 billion (or 1.2% of GDP) a year ago. This is the smallest CAD number in the last decade.
But the improvement comes with three trouble spots:
1.

The narrowing was caused almost entirely by a sharp fall in trade deficit (goods + services), which is down to
$8.06 billion from its peak of $34 billion in June 2013. This decline is, in turn, a result of steep and continued
decline in imports. Imports declined 6.9% on-year for the quarter, while exports stagnated (at -0.1%).

2.

Capital flows needed to finance the CAD stood at $113 million on a net basis in Q1FY17, much lower than the
$7.2 billion seen in the same period last year. Therefore, despite a much slimmer CAD, the rupee weakened 5.4%
on-year as capital inflows dwindled. Foreign direct investments (FDI) saw a drop, both on-year and on-quarter.
Other foreign investments such as deposits and trade credit also tanked, but a pick-up in inflows from foreign
portfolio investors (FPIs) provided some buffer.

3.

Workers remittances (which comprise 8% of current account receipts) fell about 2% on-year, indicating rising
economic stress in the Middle East due to low oil prices. More than half of workers remittances to India come
from the Gulf of Cooperation Council, comprising Saudi Arabia, UAE, Kuwait, Oman, Qatar and Bahrain.

Data for the first two months of the second quarter (Q2FY17) suggests goods imports continued to fall (by 16.6% on
average) faster than exports. This caused the trade deficit to narrow further to about $15 billion in these two months,
compared with nearly $23.8 billion in the first quarter. The worry, however, is that services exports too have fallen, by
4.6% in July. Services exports grew 3.3% on-year in the first quarter.

Given the sharp fall in CAD, we now expect it to be lower at 1% of GDP in fiscal 2017, down from 1.3% in fiscal 2016.
Export growth, we believe, will remain tepid through fiscal 2016 given that global growth forecasts have edged lower.
For yet another year, low import demand (muted oil imports due to benign crude oil prices and weak gold imports given
domestic policy restrictions) will anchor Indias CAD. But towards the second half of the fiscal, we expect some upside
from core imports (non-oil, non-gold), which are expected to rise on the back of a gradual pick-up in domestic
consumption and investment demand.

Figure 1: Falling trade deficit drags down CAD

Figure 2: Rupee weaker on lower inflows

11.8 10.1 10.3

US$ mn

US$ bn

7.8

CAD

Capital flows

INR/US$ (RHS)
68.0

18.0

20.9

66.0

-0.3

64.0

-7.5 -6.1

8.0

-8.1

62.0
7.6

-17.5 -16.4

-2.0

Current account
balance

Trade account balance

-7.5

0.1

60.0

-6.1

-0.3

58.0
56.0

-12.0

Jun-16

Jun-15

Jun-14

Jun-13

Jun-16

Jun-15

Jun-14

-33.6

Jun-13

Jun-16

Jun-15

Jun-14

Jun-13

-21.8

7.2

54.0
52.0

-21.8
-22.0

Income account
balance

50.0
Jun-13

Jun-14

Jun-15

Jun-16

Source: RBI, CEIC, CRISIL Research

Import squeeze swells current account

The current account saw a record low deficit of $277 million (or 0.1% of GDP) in Q1FY17, down from a deficit of
$6.1 billion (or 1.2% of GDP) a year ago. With this, the CAD is down nearly $21 billion compared with its peak in
June 2013, and is also the lowest in a decade.

The sharp fall in CAD, however, has come almost entirely on the back of a shrinking trade deficit (goods +
services). Trade deficit fell to $8.06 billion in Q1FY17, down from $16.2 billion a year ago. Meanwhile, the balance
in the income account (primary plus secondary) narrowed for the third consecutive quarter, falling $3 billion onyear, to $7.8 billion. The continued slowdown in workers remittances is a key factor behind this. Remittances fell
about 2% on-year, indicating rising economic stress in the Middle East due to low oil prices.

Imports of goods and services fell 6.9% on-year in Q1FY17, while exports stagnated (at -0.1%). Goods exports
saw a sharp decline of 2.1% while imports were down 11.5%. The drop in imports mainly came from a decline in
gold imports but consumption and investment-related imports too have continued to tank. Exports have seen
some revival this year, but recovery remains fragile given that the global growth outlook is uneven and weak. The
slowdown is sharper in exports to the UK and China, while those to the European Union, Japan and the UAE have
been stronger this fiscal. Interestingly, while exports to China have slowed sharply, imports, too, have fallen at a
rapid pace. As a result, trade deficit with China which had been bulging since fiscal 2013 is now lower than
last years levels.

Meanwhile, services exports rose 3.3%, while imports grew at a faster pace of 15.8%. There was a sharp increase
in imports on account of transport, travel (both personal and business), and telecom and computer and
information services during Q1FY17. Recent data, however, suggests that services exports suffered a blow in
July.

Capital flows dwindle in Q1, but may be coming back

Capital flows needed to finance the CAD stood at $113 million on a net basis in Q1FY17, much lower than the $7.2
billion seen in the same period last year and also lower than the $160 million in Q4FY16.

Therefore, despite a much slimmer CAD, the rupee weakened 5.4% on-year.

FDI saw a sharp decline, both on-year and on-quarter. Net FDI stood at $4.1 billion, down 59% on-year, and 53%
on-quarter.

Other foreign investments such as deposits and trade credit also tanked, but a pick-up in FPI inflows provided
some buffer. Net FPI inflows rose to $2.1 billion, compared with outflows of 50 million a year ago, and $1.5 billion
a quarter ago.

This momentum in FPI flows has continued in the Q2FY17 as well. For the April-August period, net FPI stood at
$5.5 billion, compared with net outflows of $1.8 billion in the same period last year. Funds appear to have again
found their way back into India as global markets stay awash with liquidity thanks to accommodative monetary
policies of central banks. Meanwhile, India, with better domestic growth compared with peers, led by a good
monsoon, approval of the Seventh Pay Commission recommendations and the passage of the Constitutional
Amendment Bill for Goods and Services Tax, remains in a sweet spot.

Analytical Contacts:
Dharmakirti Joshi
Chief Economist, CRISIL Ltd.
dharmakirti.joshi@crisil.com

Dipti Deshpande
Senior Economist, CRISIL Ltd.
dipti.deshpande@crisil.com

Media Contacts:
Tanuja Abhinandan
Media Relations
CRISIL Limited
D: +91 22 3342 1818
M: +91 9819248980
B: +91 22 3342 3000
tanuja.abhinandan@crisil.com

Shamik Paul
Manager Communications
CRISIL Limited
D: +91 22 3342 1942
M: +91 9920893887
B: +91 22 3342 3000
shamik.paul@crisil.com
3

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Last updated: April 2016

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