The Telegraph
Thursday , March 6 , 2014
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CAD on comfort course

Mumbai, March 5: India’s current account deficit (CAD) fell to a four-year low at $4.2 billion in the third quarter ended December 31, or 0.9 per cent of the gross domestic product (GDP), giving the beleaguered UPA government something to crow about as the country heads into a crucial general election next month.

The CAD, which is the difference between inflows and outflows of foreign capital that encapsulates trade in goods and services, was down from the $5.2 billion, or 1.2 per cent of India’s GDP, in the second quarter.

The deficit stood at $31.9 billion, translating to 6.5 per cent of India’s GDP, during the third quarter of 2012-13.

A lower CAD is good news particularly for the Indian currency that hit historic lows last year.

On a day the Election Commission announced the much awaited polling schedule, the Reserve Bank of India released the balance of payments (BoP) data that showed CAD had dipped because of a decline in the trade deficit, arising from an increase in merchandise exports and a moderation in imports particularly of gold.

Over the past few months, the government and the RBI have imposed curbs on gold imports and also raised the customs duty on the commodity to 10 per cent. With imports of the yellow metal falling as a result and the CAD moderating further, pressure is now mounting on the Centre to withdraw at least some of the restrictions imposed last year.

Incidentally, the curbs on imports of gold have led to a drastic rise in smuggling of the precious metal. Recently, the World Gold Council estimated that close to 200 tonnes of gold had entered through the unofficial route in 2013.

According to the RBI, merchandise imports at $112.9 billion recorded a decline of 14.8 per cent in the third quarter of this year against an increase of 10.4 per cent in the corresponding quarter of 2012-13.

The decline in imports in the October-December quarter, it added, was primarily led by a steep decline in gold imports, which amounted to $3.1 billion against $17.8 billion last year and $3.9 billion in the second quarter of 2013-14.

In his interim budget speech, finance minister P. Chidambaram had forecast that the year-end CAD would be contained at $45 billion, well below the record high level of $88 billion in 2012-13.

Experts, however, feel that if the current trend continues, the CAD could dip below $40 billion by the end of March. Many feel that it will be somewhere between $35 and $40 billion. In 2012-13, the CAD had peaked at $88.2 billion.

Although the CAD for the third quarter is largely in line with the estimates of economists, forex market circles feel the rupee could rally when trading resumes tomorrow.

The RBI said merchandise exports had increased 7.5 per cent to $79.8 billion in the third quarter, higher than the growth of 3.9 per cent in the same period of 2012-13. This was possible because of a significant growth in exports of engineering goods, readymade garments, iron ore, marine products and chemicals.

As a result, merchandise trade deficit (BoP basis) contracted by around 43 per cent to $33.2 billion from $58.4 billion a year ago.