Due to rising surpluses in services trade, India’s overall deficit in goods and services transactions shrank by 35% in the first eleven months of the current fiscal. This augurs well for a lower and more manageable imbalance in the current account, which is the broadest measure of the country’s external transactions with the rest of the world. In the previous fiscal, a challenging international context — war in Ukraine, worsening US-China trade tensions, a slowing world economy – was reflected in a near-doubling of the current account deficit to $67.1 billion or 2% of GDP. But this could be halved to 1% or less of GDP in FY 24, according to economists and leading rating agencies reported in this newspaper, as monthly surpluses in services trade have averaged $13.9 billion — steadily increasing from November – which offsets to a large extent the average monthly deficit in goods trade of $20.5 billion.
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If this uptrend is sustained in March and beyond, there is even a prospect of net exports of goods and services transactions turning positive, pushing up the country’s GDP growth in the first quarter of FY 25. What accounts for the services boom? This is directly related to India increasingly becoming a knowledge–based economy as software services have consistently comprised half of services exports. A gradual increase in the share of business services – which include R&D, professional and management consultancy — has also been observed since FY 20, reflecting the growing number of global capability centres in India. Business services accounted for 26.4% of services exports in the first half of FY 24, up from 19 % in FY14. GCCs are facilities set up by global giants to house critical functions such as R&D, IT and business process management in locations away from their headquarters to support their operations. With 1,580 centres located here, India accounts for 45-50% of GCCs worldwide outside of their home country.
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This factor is an important part of the story of our booming services exports. GCCs also will provide opportunities for diversifying beyond the traditional software exports to finance and emerging technologies. For instance, around 30% of digital banking products produced globally are developed in GCCs in India according to a NASSCOM-KPMG in India report. While the growing service trade surpluses are no doubt important, another factor is equally critical for a more manageable current account deficit in FY 24. This pertains to the steady increase in private transfers or remittances from the vast Indian diaspora working overseas which contribute to surpluses in invisibles that largely offset the huge merchandise trade imbalance. Remittances have transformed India’s external profile into one of the biggest strengths of the economy over the years.
Also Read Chinese Perceptions of India Anchoring trust within MSMEs: Making significant contribution to resolving business challenges India’s agri-tech revolution is leaving women farmers behind Making farming profitable Without the boom in transfers, India would have registered much higher current account deficits than otherwise. Services and transfers were together responsible for the moderation of the current account deficit to 1% of GDP in the first half of FY 24 from 2.9% of GDP during the first half of FY23. With the prospects of this extending to FY24 as a whole, a smaller-than-expected current account deficit will doubtless be considered as evidence that India’s external situation is stable. The expectation clearly is that an imbalance of 1% of GDP can easily be financed by net inflows into the capital account of the balance of payments like foreign direct investments, portfolio investments, among others.
Due to rising surpluses in services trade, India’s overall deficit in goods and services transactions shrank by 35% in the first eleven months of the current fiscal. This augurs well for a lower and more manageable imbalance in the current account, which is the broadest measure of the country’s external transactions with the rest of the world. In the previous fiscal, a challenging international context — war in Ukraine, worsening US-China trade tensions, a slowing world economy – was reflected in a near-doubling of the current account deficit to $67.1 billion or 2% of GDP. But this could be halved to 1% or less of GDP in FY 24, according to economists and leading rating agencies reported in this newspaper, as monthly surpluses in services trade have averaged $13.9 billion — steadily increasing from November – which offsets to a large extent the average monthly deficit in goods trade of $20.5 billion.
If this uptrend is sustained in March and beyond, there is even a prospect of net exports of goods and services transactions turning positive, pushing up the country’s GDP growth in the first quarter of FY 25. What accounts for the services boom? This is directly related to India increasingly becoming a knowledge–based economy as software services have consistently comprised half of services exports. A gradual increase in the share of business services – which include R&D, professional and management consultancy — has also been observed since FY 20, reflecting the growing number of global capability centres in India. Business services accounted for 26.4% of services exports in the first half of FY 24, up from 19 % in FY14. GCCs are facilities set up by global giants to house critical functions such as R&D, IT and business process management in locations away from their headquarters to support their operations. With 1,580 centres located here, India accounts for 45-50% of GCCs worldwide outside of their home country.
This factor is an important part of the story of our booming services exports. GCCs also will provide opportunities for diversifying beyond the traditional software exports to finance and emerging technologies. For instance, around 30% of digital banking products produced globally are developed in GCCs in India according to a NASSCOM-KPMG in India report. While the growing service trade surpluses are no doubt important, another factor is equally critical for a more manageable current account deficit in FY 24. This pertains to the steady increase in private transfers or remittances from the vast Indian diaspora working overseas which contribute to surpluses in invisibles that largely offset the huge merchandise trade imbalance. Remittances have transformed India’s external profile into one of the biggest strengths of the economy over the years.
Without the boom in transfers, India would have registered much higher current account deficits than otherwise. Services and transfers were together responsible for the moderation of the current account deficit to 1% of GDP in the first half of FY 24 from 2.9% of GDP during the first half of FY23. With the prospects of this extending to FY24 as a whole, a smaller-than-expected current account deficit will doubtless be considered as evidence that India’s external situation is stable. The expectation clearly is that an imbalance of 1% of GDP can easily be financed by net inflows into the capital account of the balance of payments like foreign direct investments, portfolio investments, among others.
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Booming services trade: Prospects are for a lower-than-expected current account deficit in FY24
15
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22.03.2024
Due to rising surpluses in services trade, India’s overall deficit in goods and services transactions shrank by 35% in the first eleven months of the current fiscal. This augurs well for a lower and more manageable imbalance in the current account, which is the broadest measure of the country’s external transactions with the rest of the world. In the previous fiscal, a challenging international context — war in Ukraine, worsening US-China trade tensions, a slowing world economy – was reflected in a near-doubling of the current account deficit to $67.1 billion or 2% of GDP. But this could be halved to 1% or less of GDP in FY 24, according to economists and leading rating agencies reported in this newspaper, as monthly surpluses in services trade have averaged $13.9 billion — steadily increasing from November – which offsets to a large extent the average monthly deficit in goods trade of $20.5 billion.
Also ReadHow can India achieve USD1 trillion in exports: Decoding the roadmap
If this uptrend is sustained in March and beyond, there is even a prospect of net exports of goods and services transactions turning positive, pushing up the country’s GDP growth in the first quarter of FY 25. What accounts for the services boom? This is directly related to India increasingly becoming a knowledge–based economy as software services have consistently comprised half of services exports. A gradual increase in the share of business services – which include R&D, professional and management consultancy — has also been observed since FY 20, reflecting the growing number of global capability centres in India. Business services accounted for 26.4% of services exports in the first half of FY 24, up from 19 % in FY14. GCCs are facilities set up by global giants to house critical functions such as R&D, IT and business process management in locations away from their headquarters to support their operations.........
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