India has always had a twin deficit problem, fiscal deficit and current account deficit. The good news emerging now is that the current account is fast turning a surplus boosted by sharp growth in services exports. Services exports have now risen 28 percent to $272 billion in the first 11 months of FY23, compared with $254 billion in FY22. It has been rising in double-digits for the past two years after recovering from the pandemic years.
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“Our baseline projection suggests a lower deficit. Services export is a more resilient space, even there you will see moderate growth. Challenges on the current account are much less than expectations,” says Sonal Varma, Chief Economist-India & Asia Ex-Japan at Nomura Financial Advisory & Securities.
The key component in India’s services exports continues to be software exports, which have grown to $109 billion in FY22 from about $84 billion in FY20, a smaller category called business consultancy services has grown from a negative $1.16 billion in FY20 to $7.28 billion in FY22 and further to $8.6 billion in the first six months of this year.
Experts believe that business consultancy inflows are actually from Global Captive Centres set up by foreign companies in India to process their middle office work – like I.T. accounts, compliance etc.
This flow has probably jumped because of comfort with remote work after COVID, high wage inflation in the west in the past year and the growing cheap and high-quality Indian educated workforce.
"Outsourcing is expanding in non-financial sectors as well, as global captive centres are growing in the country, their spends are also growing," says Arindam Sen, Partner, markets and business development at EY LLP.
“We will likely see continued growth in services exports,” Sen adds.
A look at the monthly data comparison across three years from October to February shows that the per-month services exports in FY23 are a good 60 percent above the FY21 levels.
Rising service exports have a huge impact on India’s overall trade balance. India’s merchandise trade deficit had shot up in 2022 to $25-30 billion per month due to high crude, fertiliser and commodity prices.
But in 2023, not only is the goods trade deficit shrinking due to lower crude and commodity prices, the surge in services exports is shrinking the overall goods and services deficit to just $1-2 billion per month from a high of $10-20 billion per month in 2022.
Indians living abroad and crediting money to families in India — called private transfers are also rising. This could touch $100 billion this year.
Together, with the fall in goods and services trade deficit and rise in remittances from Indians abroad, the country looks set to post a current account surplus in the current January-March quarter.
Indeed, given the continued growth in services exports, India may report a current account surplus or a negligible deficit for the next few quarters.
The balance in the current account brings many advantages.
The IMF could dictate terms in 1991 because India had a huge current account deficit, likewise in 2013, India’s current account deficit shot up to 5 percent and the rupee fell over 20 percent to 68 per dollar from 55 per dollar in three months. The RBI had to raise interest rates to shore up the rupee which in turn hurt growth.
A balanced current account gives policymakers more freedom to chase inflation and growth targets. A balanced current account keeps the currency more stable, and usually attracts foreign portfolios and domestic investors.
The current surge in service exports and the likely current account surplus can be a boon for growth and a plus for India’s economy.
For the entire discussion, watch the accompanying video