India's current account deficit (CAD) is projected to remain within a manageable range in the upcoming fiscal year, offering a buffer against global economic volatility. According to a recent report by the rating agency CRISIL, the CAD is expected to stay at a comfortable 1.2% of the Gross Domestic Product (GDP) for the financial year 2024-25 (FY25). This stability is attributed to a favourable combination of external factors, including a decline in global crude oil prices, a sustained surplus in services exports, and resilient inflows from remittances.
Key Pillars Supporting a Stable External Account
The analysis highlights three primary factors that will act as pillars of strength for India's balance of payments. First and foremost is the anticipated moderation in global crude oil prices. CRISIL expects the average price of the Indian crude basket to be around $80-85 per barrel in FY25, which is lower than the levels witnessed in the recent past. Given that India is a major oil importer, this price easing directly reduces the import bill, which is the largest component of the country's trade deficit.
The second crucial factor is the continued robust performance of the services sector. India has consistently maintained a significant surplus in services exports, driven largely by software and business process outsourcing. This surplus has been a critical counterbalance to the deficit in merchandise trade. The report suggests this trend will persist, providing a steady stream of foreign exchange earnings.
Steady Remittances and Merchandise Trade Outlook
The third pillar is the steady flow of remittances from the Indian diaspora. Despite global economic headwinds, remittance inflows have remained remarkably resilient, serving as a reliable source of foreign currency. This, coupled with the services surplus, helps finance the merchandise trade gap.
On the merchandise trade front, while the deficit remains, there are signs of improvement. The report notes that non-oil, non-gold imports have shown weakness, reflecting subdued domestic demand for certain goods. Furthermore, the growth in goods exports is expected to see a modest uptick, supported by a potential recovery in global demand. These dynamics will help contain the overall trade deficit.
Implications for the Indian Economy
A CAD projected at 1.2% of GDP is considered eminently financeable and well within comfort levels for an economy of India's size and growth trajectory. This forecast provides several positive implications. It reduces immediate pressure on the Indian rupee (INR) as the demand for foreign currency to cover a large deficit is less intense. A stable rupee, in turn, helps contain imported inflation and provides greater predictability for businesses and policymakers.
The manageable deficit also implies that India will not be overly reliant on volatile foreign capital flows to bridge its external gap. It strengthens the country's external sector resilience at a time when global financial conditions remain uncertain due to persistent inflation and high interest rates in advanced economies.
In conclusion, CRISIL's assessment paints a reassuring picture for India's external account health in the near term. The interplay of lower crude prices, a strong services export engine, and durable remittance inflows is expected to keep the current account deficit in a safe zone, providing macroeconomic stability as the nation pursues its growth ambitions.
