The Telegraph
Tuesday , May 27 , 2014
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Gold curbs tame deficit devil

Mumbai, May 26: Some good news for the economy on a day the new government was sworn in — current account deficit (CAD) has dropped sharply to $1.2 billion, or 0.2 per cent of GDP, in the January-March quarter of the current fiscal.

The lower CAD, which is the difference between foreign exchange earned and spent, came largely on account of a decline in imports, especially gold.

CAD stood at $18.1 billion, or 3.6 per cent of GDP, in the January-March quarter of 2012-13.

CAD had risen sharply in 2012-13, having an adverse impact on the rupee that hit an all-time low of 68.85 against the dollar in August. This prompted both the government and the RBI to come out with steps to bring down the deficit. The consumption of gold was curbed by raising import duties and imposing other restrictions.

During the January-March quarter, gold imports fell steeply to $5.3 billion compared with $15.8 billion in the same quarter a year ago, according to data from the Reserve Bank of India.

The rupee, too, has regained its ground against the dollar. The Indian unit is now trading under the 59-level against the US currency and the RBI has turned to buying dollars to reduce volatility.

The lower CAD numbers are expected to bolster the intentions of the new government to relax the restrictions on gold imports, including lowering the import duty.

Recently, the RBI allowed select trading houses to import gold under the 20:80 scheme. While these entities were earlier barred from importing the yellow metal, the green signal given by the central bank led to prices of the commodity softening in the domestic market.

For the full fiscal 2013-14, CAD came down to $32.4 billion, or 1.7 per cent of GDP, from $87.8 billion (4.7 per cent of GDP) in 2012-13.

Aditi Nayar, senior economist at Icra, said, “The sharply lower current account deficit for the fourth quarter of 2013-14 is largely in line with expectations, benefiting from the continuation of restrictions on gold imports as well as muted imports of capital goods following weak investment activity.”

However, Nayar said lifting of restrictions on gold imports might widen the current account deficit by an additional $10-15 billion.

During the fourth quarter, exports declined 1.3 per cent to $83.7 billion against an increase of 5.9 per cent in the year-ago period. Imports, however, moderated by 12.3 per cent to $114.3 billion compared with a decline of 1 per cent in the year-ago quarter.

The sharp fall in imports helped the trade deficit in the January-March period to decline 33 per cent to $30.7 billion from $45.6 billion a year earlier.

Further, net services receipts improved during the January-March quarter on account of higher exports of services. Net services at $19.6 billion grew 15.6 per cent against a decline of 3.9 per cent last year.

However, the country’s balance of payments surplus shrank to $7.1 billion in the fourth quarter from $19.1 billion in the preceding three months.

CAD is likely to remain soft in the current fiscal.

In a recent report, Citigroup said the country’s net oil import bill was likely to be around 10 per cent lower during the year because of a moderation in crude oil prices and fuel price reforms. It expects CAD to be around 2.3 per cent of GDP this fiscal with the new government focusing on exports and reducing dependence on imports.