Current account deficit to rise to 2.7% of GDP in Q3 FY18

by Mahesh Vyas

The current account deficit fell to USD 7.2 billion during the quarter ended September 2017. This was half of the USD 15 billion deficit recorded during the quarter ended June 2017. We expect this to rise to USD 17.5 billion in the quarter ended December 2017. This would be 2.7 per cent of GDP.

The deficit on goods and services trade, which is the largest component of the current account, declined from USD 23.7 billion in the June 2017 quarter to USD 14.4 billion in the September quarter. This is the biggest source of improvement in the current account deficit in the September 2017 quarter. But, the deficit on the primary account increased to a record USD 8.5 billion. This reflects a big increase in dividends and profits on investments made by foreigners in India. Next, secondary income, which is largely remittances of Indians abroad, contributed to a reduction in the deficit as its net flows increased from USD 14.5 billion in the previous quarter to USD 15.7 billion in the September 2017 quarter.

In spite of the improvement in the current account deficit in the quarter ended September 2017, the CAD appears to be vulnerable to an increase in the coming quarters because data of the recent past show a significant deterioration and because advance information show a continuation of this trend in the December 2017 quarter.

After a near-balancing of net current account inflows in the quarters ended March and June 2016, it quickly slipped into the clearly-negative zone. As a result, the average CAD was substantially higher at Rs.8.4 billion during the past four quarters (December 2016 through September 2017) compared to an average CAD of Rs.2.8 billion in the preceding four quarters (December 2015 through September 2016).

General merchandise trade, which is the biggest source of the deficit on the current account shows an average trade deficit on BoP at USD 34 billion during the four quarters ended September 2017 which was much higher than the USD 27 billion average deficit during the preceding four quarters.

This trend of a rising trade deficit is expected to continue into the third quarter which ends in December 2017 because trade data based on customs movements of goods show a much elevated average monthly deficit of USD 14 billion compared to an average of USD 10.7 billion in the quarter ended September 2017.

Exports and imports, both have been rising in recent months and exports seem more vulnerable to a slowing down because of cash-flow related problems associated with the implementation of GST. At the same time, imports could keep rising as crude oil prices have risen. The average price of the Indian basket of crude oil during October and November 2017 was, at USD 58.7 per barrel, 15 per cent higher than the average USD 51 per barrel in the quarter ended September 2017.

The deficit on account of goods merchandise trade could hit USD 45 billion in the quarter ended December 2017.

Part of the deficit on merchandise trade is offset by trade in services. Against a payments deficit of USD 32.8 billion on merchandise trade, services trade delivered a surplus of USD 18.4 billion in the September 2017 quarter. Almost the entire surplus on the services account comes from IT services. However, this has been delivering diminishing returns since March 2015 when it had peaked at USD 18.9 billion. It is therefore likely that the surplus on services would be lower than USD 18 billion in the quarter ended December 2017. This could leave a deficit on goods and services of about USD 27 billion, almost twice the USD 14 billion deficit in September 2017.

The other two major components of the current account - primary and secondary incomes could reduce this USD 27 billion deficit on account of goods and services to about USD 17.5 billion.

The deficit on account of primary income shot up during the quarter ended September 2017. But, this deficit is unlikely to rise any further or even sustain itself in the December quarter. Although external borrowing has increased and interest rates are hardening, the outgo could be tempered because of the seasonal nature of dividends and re-invested profits. Outgo on these accounts would be lower in the December quarter and the primary income account could end with a deficit of USD 6 billion against the USD 8.5 billion deficit in the September 2017 quarter.

On the secondary income account, workers remittances surged during the first two quarters of 2017-18 in contrast to a falling trend. Remittances in particular and secondary incomes as a whole had flattened after March 2012 and had started falling after March 2014. The reversal from March 2017 has sustained itself till September 2017. We expect some moderation in the coming quarter to USD 15.5 billion from USD 15.7 billion in the previous quarter.

As a result, the current account deficit is likely to settle close to USD 17.5 billion. This would be 2.7 per cent of GDP compared to 1.15 per cent in September 2017.

CMIE STATISTICS
Unemployment Rate
Per cent
5.4 -0.0
Consumer Sentiments Index
Base September-December 2015
95.6 0.0
Consumer Expectations Index
Base September-December 2015
95.7 -0.3
Current Economic Conditions Index
Base September-December 2015
95.5 +0.5
Quarterly CapeEx Aggregates
(Rs.trillion) Sep 17 Dec 17 Mar 18 Jun 18
New projects 1.25 1.49 3.60 2.27
Completed projects 1.25 1.15 1.42 0.82
Stalled projects 0.69 0.88 3.41 0.30
Revived projects 0.34 0.22 0.26 0.22
Implementation stalled projects 0.78 0.71 1.92 0.03
Updated on: 17 Jul 2018 8:20PM
Quarterly Financials of Listed Companies
(% change) Sep 17 Dec 17 Mar 18 Jun 18
All listed Companies
 Income 7.9 12.0 10.2 18.1
 Expenses 9.0 13.0 17.0 21.4
 Net profit -18.0 -14.3 -81.9 8.4
 PAT margin (%) 5.5 4.8 1.2 17.4
 Count of Cos. 4,501 4,491 4,283 45
Non-financial Companies
 Income 8.2 13.3 11.8 18.5
 Expenses 8.1 12.3 12.7 22.7
 Net profit -6.1 13.2 -2.5 6.7
 PAT margin (%) 6.2 6.4 6.5 18.1
 Net fixed assets 9.2 11.9
 Current assets 2.9 8.0
 Current liabilities 11.0 10.3
 Borrowings 3.4 1.8
 Reserves & surplus 7.9 7.8
 Count of Cos. 3,460 3,463 3,315 32
Numbers are net of P&E
Updated on: 17 Jul 2018 8:21PM
Annual Financials of All Companies
(% change) FY15 FY16 FY17 FY18
All Companies
 Income 5.6 1.8 5.8 12.3
 Expenses 5.7 1.9 5.8 17.9
 Net profit 0.1 -9.3 26.2 -51.0
 PAT margin (%) 3.0 2.8 3.5 3.6
 Assets 9.5 10.2 7.3 14.1
 Net worth 8.5 11.3 7.0 11.0
 RONW (%) 5.8 4.9 5.9 4.8
 Count of Cos. 26,056 24,316 21,815 218
Non-financial Companies
 Income 4.8 1.0 5.7 9.8
 Expenses 5.0 0.3 5.9 9.3
 Net profit -8.5 20.4 21.4 11.9
 PAT margin (%) 2.0 2.5 3.0 13.4
 Net fixed assets 13.3 17.4 6.5 21.2
 Net worth 7.0 12.0 5.7 5.3
 RONW (%) 4.6 5.2 6.1 17.7
 Debt / Equity (times) 1.1 1.1 1.0 0.2
 Interest cover (times) 1.9 1.9 2.1 16.0
 Net working capital cycle (days) 66 65 62 -12
 Count of Cos. 21,269 20,387 18,246 150
Numbers are net of P&E
Updated on: 04 Jul 2018 4:50PM