Expectations of a current account surplus come falling down

India's current account deficit (CAD) narrowed sharply to 0.2% of the GDP or $1.3 billion the quarter ended March 31, 2015 as against $8.3 billion in the third quarter ended December 31, 2014. 

Edelweiss, in its report dated June 11, said, "Current account deficit (CAD) for Q4FY15 came in at $1.5 billion (0.2% of GDP) against our expectation of a modest surplus." Kotak Economic Research's Upasna Bhardwaj, Madhavi Arora and Suvodeep Rakhsit in a report dated June 11 said that the expectations of a current account surplus in the fourth quarter were belied thanks to higher-than-expected deviation between DGIS and RBI data. 

Emkay Research, too, showed its disappointment and said ,"The much awaited current account surplus in Q4 failed to materialize despite moderation in crude prices."

The preliminary data provided by the Reserve Bank of India (RBI) showed that the CAD was actually a shade higher than $1.2 billion that was recorded in the fourth quarter of 2013-14. This is against the expectations of analysts that lower crude oil prices will help India post a current account surplus, albeit a small one, but nonetheless a surplus in the fourth quarter. 

Although CAD has fallen sharply on a sequential basis because of the fall in oil and commodity prices, India's problems don't seem to be ending anytime soon. 

RBI said, "The merchandise trade deficit ($31.7 billion during Q4 2014-15) contracted sharply on a q-o-q basis on account of a larger decline in merchandise imports (13.4%) than in merchandise exports (10.4%); however, in terms of y-o-y changes, the trade deficit in Q4 2014-15 widened marginally as exports registered a larger decline (15.4%), than imports (10.4%)."

Kapil Gupta and Prateek Parekh of Edelweiss said, "Sub‐trends indicate that merchandise exports contracted ~15% year-on-year, which is concerning. The decline was largely on account of commodity‐based exports such as agriculture and petro products (whose prices have declined), although even manufactured goods exports lost pace. However, software exports maintained stable growth of 5% YoY and even remittances were stable and healthy."   

The good news is definitely the fact that imports contracted but the exports which were supposed to be go up, haven't. Instead, on an year-on-year basis, Indian exports have contracted by over 15% and the trade deficit has widened. 

Dhananjay Sinha and Kruti Shah of Emkay said, "We believe, if the government and RBI undertake counter-cyclical policies to improve growth, there would be inherent pressure on CAD which in turn would widen from the current level. We estimate CAD to widen to 1.8% of GDP in FY16 from 1.4% in FY15 with limited improvement from the exports growth." 

"Firming up of commodity prices is also likely to supplement widening deficit," they said. 

Even though the sharp fall in CAD is a good sign as imports became cheaper due to lower oil and commodity prices, analysts were expecting India to post a current account surplus and lower export numbers have came as a worrying factor. 

Gupta and Parekh of Edelweiss said, "Though agri commodities and petro products spearheaded the exports dip, manufactured exports lost pace as well, a trend apparent across emerging markets."

Kotak's trio said, "Even as we expect exports growth at ~0.4% in FY2016 on the back of sluggish global demand, softer oil and commodities in general will keep import growth muted. However, we expect non-oil imports to grow 4.5%, backed by some amount of domestic growth momentum, especially through the capital goods segment. With our base case assumption of average crude price at $65per barrel, overall imports are likely to contract by 2.6% in FY2016, helping the trade deficit to narrow to 6.1% of GDP from 7.0% in FY2015. We see CAD/GDP for FY2016 at 0.4%, with further benefit if oil drifts lower."

Edelweiss duo said, " FY15 CAD stands at a comfortable 1.3% of GDP versus 1.7% in FY14. Stepping into FY16, we estimate CAD to remain contained at 1% of GDP and BoP to be extremely comfortable; however, exports outlook remains weak."