India's Services Sector Shines Amid Trade Deficit Challenges

India's services sector posts strong growth with a 9.8% rise in exports. Despite trade deficit pressures, stable FDI and FPI inflows sustain the external account. A modest export recovery and potential trade opportunities await in the medium term, influenced by global economic conditions.

India's services sector has shown remarkable resilience, registering a 9.8% increase in exports to USD 180 billion for the fiscal year thus far, according to a report by Bank of Baroda. Services imports also saw a rise of 9.6%, amounting to USD 62.9 billion, helping to achieve a service trade balance of USD 82.6 billion—an improvement over the same period last year, though the sequential growth in exports and imports remains modest.

The current account deficit for FY25 is projected to stay between 1% and 1.2% of GDP. This optimistic outlook is supported by steady Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) inflows, which benefit from advantageous interest rate differentials and policies designed to incorporate India into global supply chains. Despite a delayed monetary easing cycle potentially setting back export recovery, macroeconomic indicators suggest favorable conditions for future trade improvement.

Challenges loom as import growth threatens to surpass the gradual recovery of exports, potentially worsening the trade deficit. Although improvements were noted in September, the trade deficit for the first half of FY25 has widened compared to last year. While traditionally, the second half of the fiscal year sees a surge in export activities due to seasonal trends, full recovery is contingent on unpredictable global economic climates.

(With inputs from agencies.)