High Commodity Prices To Turn Current Account Into Deficit At 1.3% Of GDP: India Ratings

India Ratings and Research (Ind-Ra) expects the commodity price led high trade deficit in 2QFY22 to turn the current account (CA) into deficit in 2QFY22. However, a stable services trade surplus of USD24 billion would help rein in the CA deficit at USD10.1 billion (negative 1.3% of GDP) in 2QFY22 (2QFY21: surplus of USD15.3 billion, 2.4% of GDP). The CA was in surplus of USD6.5 billion (0.9% of GDP) in 1QFY22.

Ind-Ra expects the merchandise import volumes to recover further, as the economic activities picked up with the (i) ebbing of COVID-19 cases in India, (ii) improved vaccination rates and (iii) the festive season, resulting in the merchandise import bill rising to an estimated USD150 billion in 3QFY22. However, the surge in COVID-19 cases in key export destinations such as the EU and the US may keep the merchandise exports at around USD95 billion in 3QFY22. Therefore, the merchandise trade deficit is expected to come in at USD55 billion in 3QFY22.

Spread of Omicron may play a spoilsport causing economic disruption; yet, Ind-Ra believes Indian exports in FY22 will be closer to the government target of USD400 billion. Merchandise exports in 2QFY22 grew 57.8% yoy to USD102.7 billion, taking the 1HFY22 export level to USD198.2 billion. Exports in October 2021 grew 43.2% yoy. To achieve the export target of USD400 billion in FY22, exports will have to grow 18.5% yoy in the remaining five months of this fiscal. Given the trend so far in this fiscal, Ind-Ra believes it is achievable.

Key commodities such as petroleum products, iron & steel, aluminium & its products, organic chemicals and cotton yarn grew in the range of 56%-119% yoy in value terms and contributed roughly 53% to the merchandise exports growth in 2QFY22. However, volumes of such commodities grew in the range of 11%-50% yoy in the same period suggesting that the merchandise exports growth was driven largely by prices as volumes growth for all such items was less than their corresponding value growth in 2QFY22. Nevertheless, the volumes growth in 2QFY22 over 2QFY20 was in the range of 29%-89%, suggesting a strong global demand for these items.