Drop in gold imports trims trade deficit to 30-mth low

Written by fe Bureau | New Delhi | Updated: Oct 10 2013, 18:42pm hrs
Aided by a policy-enabled steep fall in gold imports, Indias merchandise trade deficit crashed to a 30-month low of $6.76 billion in September, pulling down the deficit in the second quarter of the fiscal to $29.90 billion, compared with $50.2 billion in the first quarter. The sharp fall in trade deficit could allow a squaring up of the current account deficit (CAD) in Q2, assuming that other major inflows net invisibles (services trade balance) and net private remittances remain roughly at the same level as in the first quarter at $33-34 billion and the outflow on account of investment income at $5 billion or thereabouts.

Some analysts even estimate a slight surplus on the current account in Q2, as against a deficit of $21.78 billion in the previous quarter. Even though the Reserve Bank of India governor Raghuram Rajan said on Tuesday that CAD for the current fiscal could be $70 billion, Wednesdays trade data has prompted the Prime Ministers Economic Advisory Council (PMEAC) chairman C Rangarajan who made a similar forecast in his September review of Economic Outlook 2013-14 to revise it downwards to $60 billion.

Private-sector analysts joined the bandwagon. An over $20-billion reduction in merchandise trade deficit in Q2 of FY14, compared with Q1 of FY14, suggests significant improvement in the CAD for the second quarter. Better-than-expected export growth, if sustained, creates downside to our forecast for the CAD at 3.9% of the GDP for 2013-14, a Crisil research note said. Crisils DK Joshi, however, cautioned against any euphoria, saying although a reduced CAD was indeed good news on the balance-of-payment front, the drop in imports (18% in September) was consistent with a slowdown in demand, which might not augur well for the economy.

While exports jumped 11.2% to $27.68 billion in September, partly aided

by a weak rupee, imports fell to $34.4 billion declining below the $35-billion level for the first time since April 2011. The government has taken conscious steps to curtail imports of non-essential commodities, essentially precious metals. That is working out as the government intended, commerce secretary SR Rao said.

The CAD stood at $88 billion, or 4.8%, of the GDP in FY13 but there was still an accretion of $3.8 billion to the forex reserves, thanks to robust capital inflows which precipitated a capital account surplus of $89.4 billion. The PMEAC has estimated the capital-account surplus for FY14 to be $61.4 billion, but with recent surge in FDI and expected additional inflows on account of government measures like overseas bond issues by state-run financial institutions and PSUs resorting to ECBs , the finance ministry expects the flows to be much higher.

Gold imports in Q2 was down 79% against the previous quarter at $3.5 billion, thanks to the hike in import duty on the precious metal to 10% in August from 8% in June, and the Reserve Bank norm that at least a fifth of gold bought from abroad must be used for re-exports.

Oil imports also fell, albeit marginally, to $41 billion in the second quarter from $41.9 billion in the first quarter of this fiscal. Imports, barring gold and oil, rose slightly from $64.30 billion in the June quarter to $65.1 billion in the last quarter.

We had projected the CAD at $70 billion for 2013-14, but more recent numbers clearly indicate that exports are picking up and imports are coming down and, therefore, possibly, the CAD for the current fiscal may be lower than $70 billion. It could be around $60 billion. A substantial reduction in the CAD appears possible, Rangarajan told FE.

Analysts said if exports grow by 15% from now on, reacting to the weak rupee, the outbound shipment would touch $323 billion, marking a 7.5% gain in the current fiscal. However, as India enters the crucial festival season, demand for gold is expected to rise temporarily, resulting in more imports.

Any recovery in growth in industry during the second half will mean a revival in non-oil imports which will put an upward pressure on the bill. Second, we are entering the critical festival-cum-harvest season when the demand for gold can pick up. The World Gold Council estimates that there will be a pick up in the next quarter and demand can top 300 tonnes .... Putting both together, it appears that the downward movement in imports may get reversed, said Madan Sabnavis, chief economist at CARE Ratings.

Whichever way, it looks like that the overall trade deficit this year will be lower than that last year by $ 10-20 billion, which will be useful for containing the CAD, Sabnavis said. Saugata Bhattacharya, chief economist at Axis Bank in Mumbai, predicted that deficit could disappear or even become a surplus in the September quarter, before widening again during the festive season.

M Rafeeque Ahmed, president of the Federation of Indian Export Organisations, said that the third straight monthly double-digit growth in exports strengthens their forecast that exports this fiscal will cross the target of $325 billion, and the outbound shipments may even touch $350 billion in 2013-14. He said all sectors of exports are doing well ranging from marine, agro, garments, textiles, leather, carpets to emerging sectors such as pharmaceuticals, especially chemicals and agro chemicals.