India’s current account deficit to widen to 1% of Q2 GDP: Ind-Ra

India's current account deficit (CAD) is expected to rise to around 1% of its gross domestic product (GDP) in the second quarter of FY2024-25, according to the latest India Ratings and Research (Ind-Ra) report. The current account balance (CAB) is expected to register a deficit of around $8 billion (0.8% of GDP) in Q1 FY25 vs a surplus of $5.7 billion (0.6% of GDP) in the previous quarter, says the ratings agency. The current account deficit in Q1 FY24 stood at $9.0 billion (1.0% of GDP).

Showing resilience amid uncertainty and volatility, the global trade grew 1.4% yoy in Q1 FY25, the fastest pace of growth in six quarters. There is some slackening, particularly in developed economies, as seen in the global manufacturing Purchasing Managers’ Index (PMI), which contracted (49.7) for the first time in 2024 in July on production decline.

"The slack continued even in August 2024," says Ind-Ra, expecting the merchandise exports to increase only 1.0% YoY to around $108 billion in Q2 FY25, largely due to the favourable base effect. The merchandise imports could to grow 3.5% YoY to around $176 billion in Q2 FY25. Overall, the goods trade deficit may come in at $68 billion in the said quarter.

The disruption in the economic activity in Bangladesh will likely hurt India’s intermediate exports of raw materials and petroleum products. "The silver lining is that the situation in Bangladesh acts as an opportunity for India to scale up its downstream textile exports. Bangladesh exported textiles products worth USD47.38 billion in 2023.”

Though there is a weakness in goods due to elevated interest rates, services demand is strong. The global services PMI stood at 53.3 in July 2024, remaining in expansion for the past 19 months. "The services trade surplus (is expected) at around USD44 billion in 2QFY25, up 10.6% yoy," says the report.

In Q1 FY25, the merchandise exports grew at the sharpest pace in six quarters 6% YoY, thanks to a low base effect (Q1 FY24: negative 14.1% yoy) and stable demand from the US, the UAE and the Netherlands. Goods exports were down to $110.1 billion from a seven-quarter high of $120.4 billion in the previous quarter.

The merchandise imports grew 7.6% YoY in the first quarter. Goods imports rose to $172.2 billion. The imports of primary and consumer non-durable goods grew 11.7% yoy and 14.6% YoY, respectively, due to a low base effect.

Additionally, India’s trade deficit with China continues to stay at elevated levels, says the ratings agency. The trade deficit increased to $21.8 billion in Q1 FY25 from $20.1 billion in Q4 FY24. "The trade deficit has been oscillating between $18.4 billion-$24.9 billion since Q2 FY22."