India likely to witness current account surplus after nine years?

The country's current account is set to witness a surplus in the fourth quarter (Q4) of the financial year 2015-16 (FY16)--for the first time in nine years, said Religare Institutional Research in its research note. 

The research firm has forecast the country's current account at 1% for FY16. 

India's trade deficit contracted to a five-year low in the fourth quarter (Q4) ended on March 31 this year as gold imports tanked due to the jewellers' strike and savings on net oil trade continued. 

"India’s merchandise trade deficit contracted by a sharp 55.5% year-on-year (YoY) to a five-year low of $5.1bn (nearly Rs 33,929.01 crore) in March 2016 led by a steeper fall in imports (minus 21.6%) as against exports (minus 5.5%)," Jay Shankar and Rahul Agarwal of Religare said in research note on April 20. 

According to the duo, the trade deficit has been falling in nine of the last 11 months but such a sharp decline was not anticipated. "This bodes well for the country's balance of payment (BOP)," they said.  

One of the main reasons for this possible current account surplus could be the jewellers' strike against Government's imposition of 1% excise duty that lasted for over a month. Jewellers, across India, had gone on strike from March 2 which significantly impacted the gold imports. The country's gold imports tanked 80.5% to $4 billion (nearly Rs 26,611 crore) year-on-year to $1 billion (nearly Rs 6,652.8 crore) in March this year, said the two analysts. Similarly, the country's non-oil imports declined to 17.9% during the period while the non-oil deficit witnessed a contraction of $4.3 billion (nearly Rs 28,606.83 crore), they said. 

"The contraction in non-oil exports moderated to 3.5% as a favourable base effect kicked in- this also helped contain the non-oil deficit, which had risen by 26.5% during the first 11 months of FY16," noted the two analysts. The non-oil exports were at minus 9.3% for a period between April 2015 and February 2016, they said. 

The decline in crude oil prices by 40% in an international market during February to March period has helped India to save $28.1 billion (nearly Rs 1.9 lakh crore) in its net oil trade during FY16. 

The country's oil imports declined by 35.3% year-on-year in March this year while the oil exports during the same period declined by 21.4% year-on-year, cited the two analysts. As a result, its net oil deficit declined by $2 billion (nearly Rs 13,305.5 crore) year-on-year in the same month, they added.

The merchandise trade of the country like the rest of the world has witnessed a decline in FY16 due to falling commodity prices, weak global demand and a decline in import intensity of growth. 

"India’s merchandise trade dropped to a five-year low as exports/imports declined 15.9%/15.3% in FY16," said the two analysts in a research note. 

A 45% correction in crude prices in FY16 led to a 40% plus drop in oil trade,  they said. 

The non-oil trade also declined year-on-year on sharply lower non-fuel commodity prices, cited Religare. While non-oil imports fell by 3.7%, non-oil exports stood 8.5% lower in FY16, it said. 

Trade Deficit Contraction Positive For India's Balance of Payment (BOP)

The contraction in the trade deficit is positive for the country's balance of payment (BOP), says Religare. 

India's merchandise trade deficit contracted by $19.2 billion (nearly Rs 1.3 lakh crore) to a six-year low of $118.5 billion (nearly Rs 7.9 lakh crore) in FY16 which led to the savings of $28.1 billion (nearly Rs 1.9 lakh crore) in net oil imports.

According to Religare, the decline in the merchandise trade deficit is expected to result in current account deficit (CAD) of approximately 1% in FY16, the lowest in a decade. 

"We expect growth in exports and imports to turn positive in the financial year 2016-17 (FY17) on the back of a favourable base, moderating deflation in global commodity prices and an expected improvement in external and domestic demand," said the two analysts. 

"However, given that India will grow faster than the rest of the world, its merchandise trade deficit is likely to deteriorate in FY17, as imports grow faster than exports. Consequently, we expect the CAD to worsen to approximately 1.5% of gross domestic product (GDP) in FY17," added the two analysts in a note.