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Mint
3 days ago
- Business
- Mint
India's current account deficit likely to widen in Q4 and subsequent quarters
A host of factors including India's growing trade deficit in the face of surplus factory capacity in China, uncertainty from the US reciprocal tariffs announcement, short-term foreign capital outflows, weaker remittances due to a slowing global economy, and the potential headwinds from US President Donald Trump's proposed tax on remittances could lead to a widening of India's current account deficit (CAD), experts said. This widening is expected in Q4FY25 and subsequent quarters unless there's a change in macroeconomic fundamentals, they added. To be sure, the CAD rose marginally to $11.5 billion, or 1.1% of GDP, in the October-December 2024 quarter (Q3FY25) from $10.4 billion, or 1.1% of GDP, a year earlier, despite strong growth in service exports. A widening current account deficit would put pressure on the rupee and inflate costs for businesses On a sequential basis, the CAD moderated from $16.7 billion (1.8% of GDP) in Q2FY25, according to the latest data released by the Reserve Bank of India (RBI) in March. India's merchandise trade deficit rose to a five-month high of $26.42 billion in April on the back of higher imports, even as exports rose, according to the provisional data released by the commerce ministry last month. Interestingly, the latest GST data revealed a sharp surge in imports in May. While net domestic GST revenue (after refunds) grew 9.7%, matching April's pace, net customs revenue from IGST and cess on imports soared 73% in May, a stark contrast to the modest 5.2% growth recorded the previous month. 'There is a risk of the current account and trade deficits widening this year, along with short-term foreign capital outflows as US yields rise,' said Bhanumurthy N.R., director at the Madras School of Economics. 'A global economic slowdown and the proposed US tax on remittances could also weigh on remittance inflows, adding further pressure to the external account,' he said. On Monday the yield on the benchmark US 10-year notes rose 3.2 basis points to 4.45%, while the 30-year bond yield increased 4.6 basis points to 4.98%. In contrast, Indian 10-year government bonds currently yield 6.22%. Global uncertainties are prompting investors to favour safer, higher-yielding US bonds over emerging-market debt. Fiscal year 2025 began with strong foreign investor inflows of around ₹ 28,000 crore but saw a sharp reversal in the second half, with over ₹ 2 trillion sold off, resulting in net outflows of about ₹ 1.53 trillion ($17.8 billion) for the year. Meanwhile, the Trump administration has proposed a 5% excise tax on outward remittances, which would affect millions of individuals, including green card holders and workers on H1B visas. Remittances, defined by the World Bank as funds sent from a person working abroad to their home country, are typically personal transfers between family members or individuals. 'A further rate cut by the central bank could push government bond yields lower, potentially driving more foreign capital toward higher-yielding US bonds,' Bhanumurthy added. According to a recent report by the Union Bank of India, India's CAD is expected to widen to 1.2% of GDP in FY26 from an estimated 0.9% in FY25, with the outlook for exports remaining uncertain due to the looming threat of reciprocal tariffs by the US on trading partners. It added that despite a 90-day pause on the reciprocal tariffs, India's export outlook remains uncertain. A spokesperson for the ministry of finance didn't respond to Mint's emailed queries. Meanwhile, subdued oil prices and a sharp rise in gold—driven by central banks hedging against dollar volatility— could reshape India's import mix. Despite stable crude prices through most of FY25, India's crude oil imports rose by 4.2% to 242.4 million tonnes (MT) from 232.7 MT in FY24, according to official data. This 9.7 MT increase pushed the country's import dependency slightly higher—from 88.6% in March 2024 to 89.1% in March 2025—highlighting continued reliance on overseas energy supplies. The rise in volumes, along with a modest uptick in global prices during parts of the year, drove the import bill for crude and petroleum products to $161 billion in FY25 from $156.3 billion in the previous fiscal year. Crude prices, however, have softened notably in the first two months of FY26. The Indian basket of crude—a mix of sour and sweet grades—fell from $67.73 per barrel in April 2025 to $64.04 in May, a decline of $3.69 per barrel. "For the central government, crude oil prices in the range of $60-$65 per barrel are comfortable and allow us to build adequate buffer stocks," said a senior official, who did not wish to be named. "At these price levels, we will not only meet our energy needs more affordably but also strengthen energy security," the official added. Meanwhile, petroleum product demand continues to rise, with estimates from the Petroleum Planning and Analysis Cell (PPAC) projecting record consumption of 252.9 MT in FY26, up 4.6% year-on-year. Gold is also gaining weight in the import mix. In April, India's gold imports rose 7.6% year-on-year to ₹ 26,499 crore as central banks worldwide stepped up buying amid dollar uncertainty and investors turned to the metal as a safe haven.
Mint
20-05-2025
- Business
- Mint
Demand for MGNEGS work rises in April-May, signalling strain in rural India
New Delhi: Demand for unskilled work under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) surged in April and May, indicating renewed economic strain in rural India and fragile livelihoods. According to the latest data from the ministry of rural development, 20.12 million rural households sought employment under the scheme in April, rising slightly to 20.37 million in May (as of 18 May). This follows a dip to 18.64 million in March. MGNREGS, the central government's flagship scheme providing a rural safety net, guarantees up to 100 days of unskilled manual labour to any adult member of a rural household who seeks employment. Historically, demand for work under the scheme rises when farm or non-farm job opportunities shrink. MGNREGS demand for fiscal year 2025 (FY25) peaked in May last year, when 27.18 million households sought employment, before gradually easing through the rest of the fiscal year, particularly in the final quarter. Notably, year-on-year comparisons suggest a softer start to FY26, though rising compared with the final quarter of FY25. Also read | Parliamentary panel calls for revising wage rates of MGNREGS workers The difference between the 20.37 million households demanding work so far this May (till 18 May) and the 27.18 million job-seeking households in the same month last year may reflect seasonal shifts as well as early economic undercurrents. The latest data also comes against the backdrop of robust rural consumption underpinning India's gross domestic product (GDP) growth of 6.2% in the third quarter (Q3) of FY25. However, the renewed uptick in MGNREGS demand at the start of FY26 could point to slowing momentum and emerging vulnerabilities in rural demand. Over the past financial year, monthly work demand under MGNREGS has fluctuated, declining to a low of 16.02 million in September from the 27.18 million peak in May, before rising again towards the end of the year. However, during FY26, a timely and well-distributed monsoon, as expected by the government, could offer much-needed relief by boosting farm activity, easing rural distress and tempering demand for MGNREGS jobs. Spokespersons for the ministries of finance and rural development did not respond to emailed queries seeking comment. Economists believe the recent rise in demand for work under MGNREGS may be partly driven by seasonal factors. 'Job demand under MGNREGS typically increases during lean periods when agricultural and construction activity slows down. April and May are not peak sowing months, which could explain the higher demand for work under the scheme during this period," said Bhanumurthy N.R., director at the Madras School of Economics. He noted that the decline in demand during the January-March quarter likely reflects a seasonal shift in labour patterns. 'Many rural workers might have migrated to urban areas for work or construction sites during that time, leading to a temporary fall in MGNREGS participation," he added. Also read | Centre to hold FY26 fiscal deficit at 4.4% despite global headwinds, Pakistan tensions Interestingly, the Centre has kept allocations under the scheme unchanged from the last fiscal, at ₹86,000 crore, for the financial year 2025-26. A senior official told Mint that the Centre will review its accounts around September-October, midway through the fiscal year, to assess whether certain schemes require additional funding. 'If needed, allocations for MGNREGS could be revised—but only after the half-yearly review and based on the scheme's funding requirements," said the official, who didn't want to be named. Slowing growth India's economic growth has moderated in recent quarters, weighed down by a mix of domestic and global factors. While GDP growth showed signs of recovery in the December quarter—rebounding from a near two-year low in September—it grew at 6.2%, the slowest pace since Q4 FY23 (excluding the revised 5.6% in Q2, up from an earlier estimate of 5.4%). With data for the March quarter due later this month, the economy will need to grow by 7.6% in Q4 to meet the National Statistical Office's full-year growth target of 6.5%. Even if achieved, FY25's GDP growth would fall well short of last fiscal's revised 9.2% expansion.
