India’s Current Account Deficit Contracted Whereas Fiscal Deficit Widened in August, 2019

India’s current account deficit (CAD) was $14.3 billion or 2 percent of GDP in Q1 FY19-20 compared to US$ 15.8 billion (2.3 percent of GDP) in Q1 FY18-19. The contraction of CAD was primarily on account of high invisible receipts of US$ 31.9 billion in Q1 FY19-20 as compared to US$ 29.9 billion in FY18-19.

Key performance of BOP components (BPM6):

   Current Account:

• Private transfer receipts, an indicator of remittances by Indians employed overseas, rose US$19.9 billion (6.2 percent Y-o-Y) in Q1 FY19-20 from US$ 18.6 billion in Q1 FY18-19.
• Net services receipts rose US$ 20.03 billion in Q1 FY 19-20 (7.3 percent on Y-o-Y) from US$ 18.68 billion in Q1 FY18-19 due to the rise in net earnings from travel, information technology and financial services.

    Financial Account:

• Portfolio investment which recorded net inflow of US$ 4.8 billion in Q1 FY19-20 compared to outflow of US$ 8.1 billion in Q4 FY18-19.
• Net foreign direct investment rose 45 percent on Y-o-Y to US$ 13.9 billion in Q1 FY19-20 from US$ 9.6 billion Q1 FY18-19.
• Net inflow on external commercial borrowings stood at US$ 6.3 billion in Q1 FY19-20 compared to outflow of US$ 1.5 billion in Q4 FY18-19.
• Foreign exchange reserves (on BOP basis) rose US$ 13.98 billion in Q1 FY19-20 compared to depletion of US$ 11.33 billion in Q1 FY18-19.

The contraction in CAD has both external and domestic factors. On external front, lower crude oil prices which averaged US$ 56 per barrel in 2019 compared to US$ 65 per barrel in 2018 was an important factor.

On domestic front, India's economy slowed down in Q1 FY19-20 dragged down by major factors such as weaker private consumption, slower consumer demand and slow increase in fixed investment. As a result, imports grew slower than exports which helped to improve CAD. Moreover, government of India (GOI) has taken number of steps to boost capital inflows and curb nonessential imports. Some of the major steps are as follow:

• Eased the regulatory and compliance framework for foreign portfolio investors (FPI).
• Allowed manufacturing units to access external commercial borrowings up to US$ 50 million for a minimum maturity of one year.
• Raised import tariffs on washing machines, refrigerators, tyres, aviation turbine fuel (ATF) and etc.