India Balance of Payments

India's current account deficit widens due to a higher trade deficit in September quarter.

Published quarterly by Reserve Bank of India. Updated until the July-September 2018 quarter. (Published on December 7th, 2018)

Recent Data Trend

India's current account deficit (CAD) more than doubled to USD 19.1 billion during Jul-Sep'18 (Q2 FY19) compared to USD 7.2 billion in the same quarter a year ago. In terms of the share to GDP (at market price), the current account deficit stood at 2.9% of GDP, rising from 1.1% of GDP in Q2 FY18. The CAD was around 2.4% of GDP in the previous quarter (Apr-Jun'18).

The rise in the current account deficit on account of a large trade deficit will surely pose as a concern for the economy. India is a major oil importer, and the pressure from the impact of rising oil prices on CAD has eased since the last two months. Along with this, the rupee is strengthening against the dollar compared to the previous quarter (it had hit an all-time low of 72 against the USD in Sep'18).

The widening of CAD was led by a sharp increase in the non-oil-electronic goods imports and even oil imports (due to higher crude oil prices) caused merchandise trade deficit to widen to USD 50 billion. The trade deficit a year ago stood at USD 32.5 billion. This could not be offset by the net receipts from services trade and private remittances.

While the net inflows from services increased by 10.2% to USD 20.2 billion during the Jul-Sep'18 quarter, mainly due to an increase in earnings from financial and computer services. The net inflows under the financial account have remained lower than the deficit in the current account. Private remittances by Indians employed overseas accounted for USD 20.9 billion during the quarter.

The capital account surpluses have remained roughly at the same level of USD 16.3 billion in Q2 FY18 as well as in Q2 FY19, thus proving inadequate to fund the soaring CAD. This resulted in a depletion of USD 1.9 billion from the country's forex reserves in Q2 FY19 compared to when the reserves had increased to USD 9.5 billion same period a year ago.

The foreign direct investment (FDI) moderated to USD 7.9 billion from USD 12.4 billion in the similar period of last fiscal. In addition, on the portfolio investment side, there was a net outflow of USD 1.6 billion compared to USD 2.1 billion inflow same quarter last year on account of money being pulled out from the debt and equity markets.

We believe, the threat of rising CAD coupled with the risks of fiscal slippage (fiscal deficit at 95.3% of budgeted estimate of FY19 in Apr-Sep'18) in the pre-election year might reinstate the twin-deficit situation. Consequently, adding to the worsening of the macroeconomic situation. The only respite which could have been in terms of increasing growth has also seen a slowdown (7.1% YoY) led by decline in consumption demand in Q2 FY19.

At present, quick actions to reduce the CAD are necessary to preserve macroeconomic stability in the domestic economy. If oil prices remain at the current levels into the next financial year, the full impact of fall in oil prices could lower the CAD to around 2% of GDP by 2019-20.

Brief Overview

The Balance of Payments (BoP) records all economic transactions between residents of a country and the rest of the world. The BoP account consists of Current account, Capital account, and Financial Account. 

The current account includes flows of goods, services, primary income, and secondary income between residents and non-residents and thus constitutes an important segment of BoP. The primary income account reflects the amounts payable and receivable in return for providing temporary use of labour, financial resources, or non-produced non-financial assets (natural resources). The secondary income account shows redistribution of income between resident and non-residents, i.e when resources for current purposes are provided without economic value being exchanged in return (transfers).

On the other hand, the capital account comprises credit and debit transactions under non-produced non-financial assets and capital transfers between residents and non-residents. Thus, acquisitions and disposals of non-produced non-financial assets, such as land sold to embassies and sales of leases and licenses, as well as transfers which are capital in nature, are recorded under this account.

The financial account reflects net acquisition and disposal of financial assets and liabilities during a period. Further, it shows how the net lending to or borrowing from the rest of the world has occurred. Conversely, it shows how the current account surplus is used or the current account deficit is financed.

The Reserve Bank of India (RBI) has been compiling and publishing Balance of Payments (BoP) data for India since 1948. Since then, several developments have taken place both globally and domestically.

Considering these developments and to bring out a comprehensive Balance of Payments Manual documenting current practices, procedures of compilation, presentation, coverage and sources of data for India’s balance of payments and assess them in relation to international best practices, India has shifted from BPM 5,1993 manual to BPM6,2009 method of accounting and classifying the data.

The above data has been compiled as per the latest IMF's BPM6 standard of classification. For further details visit the official website.

Next Release Date: March 8, 2019.

Balance of Payments- Annual