India’s booming services exports growth may decelerate to 5.2% in Q1, but slowing imports to keep CAD cushioned

The rising trend in India’s services exports was attributed to the country’s promising IT sector as other IT services exports increased with mid-sized firms in the sector gaining market.

Amid a global demand slowdown, India's record-breaking services exports have started losing momentum even as outbound shipments of merchandise goods are registering steeper falls.

The country's services exports registered a record growth of 24.5 percent on-year as recently as October-December last fiscal to $83.4 billion and continued to grow in double digits at 22.8 percent in January-March, according to the Reserve Bank of India (RBI) data. However, the commerce ministry estimates a moderation in numbers, with growth falling to 5.2 percent in the first quarter of the current fiscal driven by a slowdown in software and banking services globally.

The rising trend in India’s services exports was attributed to the country’s promising IT sector with mid-sized firms in the sector gaining market share. The stupendous rise was also partly led by global capability centres (GCCs), which are delivery centres set up by large multinational companies (MNCs) providing tech, engineering support, research, and development, among others. India is home to about 40 percent of global GCCs.

The global headwinds

However, the outlook has fallen due to a slowdown in key global markets, which has begun to spill over to Indian exports. This is worrying since it poses a threat to urban consumption given that the IT sector is an important generator of employment. India’s services sector which comprises trade, tourism, aviation, and business services, among others, is the largest contributor to the country’s economy and accounts for over 50 percent of the country’s GDP.

ICRA’s Chief Economist Aditi Nayar expects services exports to remain vulnerable in the current financial year with a significant reduction in hiring by IT services companies in 2022-23, amid a potential slowdown in the US economy and the onset of recession in some Eurozone countries. Growth is expected to moderate on a high base, particularly given the tepid outlook for global growth, she adds.

Merchandise exports hit

Sharper falls in merchandise goods exports are also feeding into the services side in line with slowing global growth. Latest data by the commerce ministry reveals that merchandise shipments to key export destination nations of the US and China during the first quarter of the current fiscal fell by a significant 13.9 percent, and 16.8 percent, respectively, while Indian exports to traditional partners like Bangladesh nosedived 38.6 percent in the same period.

“Part of the slowdown in services exports, around 30 percent, is with respect to merchandise. If merchandise growth is down then services such as transportation, financial services, and banking services also get affected. Last two years, we have seen phenomenal growth and then we are looking at growth in terms of percentage with respect to those peak years, therefore it is looking slightly bad. But it is not as alarming as we think,” according to a senior government official.

Impact on CAD

Evidently, the rapidly growing services exports have been limiting the impact of global headwinds on India’s trade balances. The fall in overall exports (merchandise plus services) is seen lower at 13.2 percent in June year-on-year (YoY) while merchandise alone saw a larger 22-percent-drop in that month. Even the overall trade deficit, as per government data, is seen improving by a much higher 28.26 percent YoY during the first quarter of the current fiscal but the gap in goods has narrowed by only 7.9 percent during the same period.

“India’s trade performance, after witnessing very high growth in 2022-23, has shown declining trends as compared to the high base of last year in the backdrop of the global slowdown. As per the World Bank Global Economic Prospects report (June 2023), the global economy is set to slow substantially in 2023, to 2.1 percent, after growing at 3.1% last year,” the commerce ministry said in a statement for June trade figures released on July 14.

India’s current account deficit (CAD) for 2022-23 amounted to 2 percent of gross domestic product (GDP), up from 1.2 percent in 2021-22, the Reserve Bank of India data showed. Most economists see the gap narrowing below the 2 percent mark in the current fiscal.

Terming it as less of a challenge to the economy now, Chief Economic Advisor V Anantha Nageswaran last month reportedly said that he expects India’s CAD to narrow below 2 percent of GDP in 2023–24.

The recent sharp slowdown in exports would typically raise concerns for India’s CAD, the broadest measure of trade in goods and services but economists and policymakers are of the view that softer commodity prices and a higher fall in overall imports will continue to keep India’s external finances well-cushioned despite global slowdown woes.

Services imports have moderated even more than their exports counterpart thereby keeping the services trade surplus at $35.0 billion in April-June 2023, compared with $31.07 billion in the same period last year. Similarly, aided by lower commodity prices, primarily of crude oil, goods imports saw a decline of 12.7 percent in the first quarter of the current fiscal compared to an increase of 45.0 percent in the same period in 2022-23. The price of India's crude oil basket in July remains below the $80 per barrel mark.

The sharp fall in CAD in the last quarter of 2022-23 from the record high number hit in July-September 2022 was driven by lower commodity prices, including those of crude oil, and a surge in services exports. But in recent weeks, international crude oil prices are gaining momentum due to supply cuts from Saudi Arabia and easing inflation in the US, and the impact of the demand slowdown in key markets for Indian exports is expected to continue for the next few months.

The outlook

"While the external sector outlook remains comfortable for now, we must be watchful of the global demand trajectory, which can impact trade and capital flows in the next couple of months,” Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities Ltd, said.

Notwithstanding the downward risks from a global slowdown and oil prices inching up, Federation of Indian Export Organisations’ President A Sakthivel expects exports to start showing better growth numbers shortly, pinning hopes on fresh orders and bookings ahead of the holiday season that is likely to boost demand for Indian goods from September.