CAD hits 4.9% in Q1, but BoP crisis is largely over

Written by fe Bureau | New Delhi | Updated: Oct 2 2013, 02:18am hrs
Indias current account deficit (CAD) in the first quarter of FY14 was $21.8 billion or a disquieting 4.9% of the GDP (which expanded at a four-year low of 4.4% in the quarter), Reserve Bank of India (RBI) data showed on Monday. Policymakers and analysts, however, said that was little reason to fret since things had started looking up right since May and the full-year deficit, they predicted, would be low enough to leave a few billion dollars to be absorbed into the countrys forex reserves after safely funding CAD.

Last year, CAD stood at a record $88.2 billion; still, there was an accretion of $3.8 billion to reserves. The situation would be much more sanguine this year, the finance ministry believes, and pegs the CAD for FY14 to be much lower than $70 billion or 3.7% of GDP estimated earlier. To drive home the point, ministry officials pointed to a significantly lower merchandise trade deficit for July-August ($26.4 billion as against $50 billion for Q1), a 95% slump in gold imports in August likely heralding a trend (gold imports accounted for a record 61% of the CAD last fiscal and imports of the yellow metal soared to a record 300 tonnes in April-May this fiscal), a likely pick-up in inflows under the head of invisibles. Steps being taken to curb the oil import bill originally estimated at $160 billion for the full year and increased capital inflows are expected to help too.

Analysts say CAD in Q2FY14 could come down sharply thanks to a steep decline in trade deficit. Some of them forecast the CAD for the quarter to be less than $10 billion. Next quarter, CAD will be much lower because of lower gold imports and a pick-up in exports, said DK Joshi, chief economist, Crisil.

We expect FY14 CAD at $72 or 3.9% of GDP, said Joshi.

Credit Suisse had earlier estimated the FY14 CAD at $35 billion, pinning hopes on higher invisibles especially services exports.

Excluding the increase in gold imports of $7.3 billion in Q1FY14 over the corresponding quarter of the preceding year, CAD would work out to $14.5 billion, which translates into 3.2% of GDP, RBI said in a statement. While merchandise exports fell 1.5% year-on-year to $73.9 billion in Q1, imports rose 4.7% to $124.39 billion leading to a higher trade deficit of $50.5 billion. The gap in merchandise trade was partially offset by a small rise in net receipts on account of services to $16.9 billion from $15 billion a year ago, thanks to a 5.5% fall in imports to $19.7 billion even as exports grew a moderate 2.1% to $36.5 billion.

Care Ratings chief economist Madan Sabnavis said that Q2 CAD could be lower at around 4% of GDP. While the trade deficit has shrunk in Q2, the impact of rupee depreciation may prevent CAD from falling substantially compared with the GDP, he said. While CAD may be reined in within the governments target, financing it remains a challenge given choppy FII flows, some analysts said. The finance ministry had also said that boosting capital flows would be the real challenge rather than containing CAD. It aims to attract additional capital inflows of $11 billion through a set of measures announced in August quasi-sovereign bond issues from three state-owned lenders IIFCL, Power Finance Corp and IRFC, external commercial borrowings by PSUs and ways to attract NRI deposits.

As per Mondays RBI data, Indias balance of payments slipped marginally into deficit for Q1FY14 at $346 million compared with a surplus of $2.68 billion in the previous quarter. The capital account saw a surplus of $20.8 billion in Q1 compared with a surplus of $17.8 billion in the previous quarter. Net FDI inflows stood at $6.49 billion in the quarter slightly higher than $5.7 billion in the previous quarter, while net FII inflows dipped to minus 0.24 billion from a $11.31 billion in the previous quarter. FDI inflows, which remained subdued in the last couple of years, have seen a marginal increase in Q1.

During 2012-13, CAD ballooned to $87.8 billion (4.8% of GDP) as against $78.2 billion (4.2% of GDP) during 2011-12 mainly on account of a slowdown in services exports and higher imports of oil, gold and coal. Pressure on external finances weakened the rupee and prompted the government to clamp down on gold imports by raising customs duty rates, hiking domestic diesel prices and increasing duties on non-essential electronic items like LCD TVs.

Finance minister P Chidambaram has vowed to curb the CAD within $70 billion or 3.6% of GDP in 2013-14, a move endorsed by Prime Ministers economic advisory council.