Growing services sector can make India current account surplus

In the financial year ending March 31, the net services receipts jumped 16 per cent year-on-year (YoY) to USD 45 billion which was higher that USD 38.7 billion reported a year ago   

The booming services sector helped in narrowing country’s current account deficit (CAD) in the October-December quarter. This shows the importance of the services sector for the Indian economy, which is ever expanding. In the financial year ending March 31, the net services receipts jumped 16 per cent year-on-year (YoY) to USD 45 billion which was higher that USD 38.7 billion reported a year ago according to government data. This helped in bridging the gap between the Indian exports and imports.

India has been able to successively reducing its CAD in financial year 2023-24 (April-March). In the third quarter, the CAD came down to USD 10.5 billion which was 1.2 per cent of the GDP which was down from USD 11.4 billion in the September quarter. It was 1.3 per cent of the GDP then. In Q3of FY23, CAD stood at USD 16.8 billion which was 2 per cent of GDP.

The manufacturing is picking up albeit with many miles still to go if India wishes to become the producer for the world. However, the services sector has been a dominant contributor to its gross domestic product (GDP). It accounts for nearly 60 per cent of the economy and recorded its strongest expansion in March 2024 in the last one and half decades on the back of robust demand that spurred sales and business activities, an industry survey conducted by S&P Global showed earlier this month.

The services Purchasing Managers Index (PMI) has been in an expansionary mode for 32 months in a row and rose to 61.2 in March from 60.6 recorded in February. The PMI reading above 50 indicates growth in the sector while below 50 is indicative of contraction.

The demand for Indian services from domestic as well as international sources have been on an uptick with new export business rising at their fastest pace since the series started in September 2014. Not just in the developed world, the sector is spreading its wings in emerging economies in Asia and Africa.

We have been hearing a lot about inadequate growth on the jobs front but companies in the services sectors have reported an increase hirings over the past 12 months. The pace of hiring has been fastest since August 2023 according to HSBC economist Ines Lam.

This trend has been there notwithstanding the rise in raw material and wage costs. The companies or service providers have passed on the cost to the consumers and yet there has been no letting down in businesses. The new orders have also been on the rise.

India’s services sector is also prospering because of its competitive advantage while there could be a cost pressure if input cost and labour cost continue to rise. The country has also set an ambitious target of USD 2 trillion worth shipments and the services sector will play a big role in this.

The narrowing of CAD cannot be solely attributed to the growth in services receipt. The hero has also been the merchandise exports which was at an 11 month high at USD 41.4 billion in February 2024.

For the full financial year that has gone by, the CAD is expected to come down to below one per cent of the GDP. This is a very optimistic development for the Indian macros.

There is already a growing view that India’s current account deficit could turn into account surplus in years from now. That is not something which is unachievable given that there is now a thrust on manufacturing not just for India but for the world and with services and manufacturing sectors moving in tandem.

India can take a lead as the world looks for a China+1 strategy. The country is already moving towards self-reliance in defence, semiconductors and chemicals. India is the top exporters of IT services and amid a global slowdown and economic headwinds there has been some setback but there is a strong view that that things will start to improve once leading global central banks start slashing interest rates.

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