India’s economic outlook remains upbeat, with current account deficit (CAD) expected to stabilize despite a widening in the first quarter of FY25, according to the September Economic Survey released by the Finance Ministry.

CAD expands in the first quarter, partly dampened by services exports

CAD rose to 1.1% of GDP, up from a 0.5% surplus in the previous quarter and up from 1% a year earlier. That change was largely driven by a widening of the merchandise trade deficit, which reached $65.1 billion due to strong domestic demand and weaker exports, the survey said.

However, “growth in net services receipts and growth in private transfer receipts dampened the widening of the goods trade deficit,” the survey said.

Silver line appearing in the capital account

Despite the CAD expansion, positive signs are emerging from the capital account. Foreign portfolio investors became net buyers and foreign direct investment (FDI) inflows rose from $8.5 billion in April-August 2023 to $15.7 billion in the same period in FY25, reflecting a impressive year-over-year growth of 85.6%.

These robust capital inflows have supported India’s foreign exchange reserves, which have crossed $700 billion to reach $701.2 billion as of October 4, 2024. This milestone positions India among the top economies globally in terms of concerns reserves, sufficient to cover more than 12 months of imports.

Positive signs for the commercial sector are expected over the festive period

Looking ahead, the external sector is poised for potential improvements. “As domestic demand picks up, especially during the festive season, commodity imports are expected to see an upward trend. However, a decline in international commodity prices, particularly oil, is expected to result in a decline in the total value of imports,” the economic survey noted.

Successful implementation of the Production Linked Incentive (PLI) scheme and better utilization of Free Trade Agreements (FTAs) are expected to boost commodity exports. In addition, a recovery in global growth could support growth in services and remittance receipts, further cushioning the economy.

Year-to-date FPI flows remain positive

While FDI inflows were strong, foreign portfolio investment (FPI) flows showed mixed trends, with some outflows seen in October. However, year-to-date inflows for FY25 remain positive, reflecting continued confidence in India’s macroeconomic fundamentals.

Overall, although the current account deficit has widened, the combination of strong capital inflows and rising foreign reserves suggest that India is well positioned to meet these challenges and stabilize its economic outlook in the coming months.

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