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Twin Deficit Watch: Fiscal improvements slowed in Q1FY24, but CAD likely to vanish in FY24

The current account deficit (CAD) is likely to have shrunk to USD3.5bn (0.4% of GDP) in Q1FY24, with the services trade surplus widening by USD5.32bn YoY, while the merchandise trade deficit declined by US$5bn YoY. Given that the first two quarters of a fiscal year are seasonally weaker, the sharp YoY decline in CAD (which is likely to persist into Q2FY24 as import prices of crude oil, coal, fertiliser and edible oil are down sharply YoY) is likely to result in a small current account surplus in FY24. However, the steady fiscal improvements of the past two years, driven by soaring direct tax revenue, began to taper off in Q1FY24, with corporate tax revenue decelerating sharply (up just 7.5% YoY in the year to Jun’23). Income tax, GST and customs revenue remain robust, so we still expect the fiscal deficit to decline to 5.5% of GDP in FY24.

Fiscal improvements stall as corporate tax revenue slows

The fiscal deficit (on a 12mma basis) was 6.3% of GDP in Jun’23, well above the official FY24 projection of 5.9% and our forecast of 5.5% of GDP. A worrying feature of Q1FY24 was the sharp deceleration in corporate tax revenue (+7.5% YoY on a 12mma basis, after declining YoY in Q1FY24). Income tax, GST and customs revenues remain robust (all growing 11-16% YoY), but any further weakness in corporate tax revenue would jeopardise our forecast for the FY24 fiscal deficit. Stronger dividends from the RBI and public sector enterprises will be a slight offset, but corporate tax revenue is about a quarter of tax revenue and needs to regain its footing.

A small current account surplus is likely in FY24

The BoP (balance of payments) current account continues its robust improvement, with the services trade surplus widening by USD5.32bn (17.1%) YoY to USD36.4bn in Q1FY24, as services exports grew 6.2% YoY, while services imports declined by 1.4% YoY during the quarter. The merchandise (customs) trade deficit has previously been reported to have declined by USD5bn to USD57.56bn in Q1FY24 (from USD62.56bn in Q1FY23), as merchandise imports declined faster than exports. We estimate that the CAD for Q1FY24 will consequently moderate to USD3.5bn (from USD13.34bn in Q1FY23) – or just 0.4% of GDP. The first half of each fiscal year is the seasonally weaker period for the current account, but Q2FY24 will also benefit from the YoY decline in key import prices. Consequently, India is on track to see its current account swing to a small surplus in FY24.

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