CAD in India plunges to $5.2 bn as exports rise, gold imports decline in quarter

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RBI said that low CAD was primarily on account of a decline in the trade deficit. Reuters RBI said that low CAD was primarily on account of a decline in the trade deficit. Reuters
SummaryAfter GDP and manufacturing numbers, CAD data too has spelt good news for Indian economy.

Current account deficit (CAD) in India narrowed sharply to $5.2 billion, or 1.2 per cent of GDP, in the July-September quarter (Q2) of 2013-14 on the back of turnaround in exports and decline in gold imports.

The current account deficit (CAD), the difference between outflow and inflow of foreign exchange, was USD 21 billion, or 5 per cent of the GDP, in the second quarter of last fiscal.

"Contraction in the trade deficit coupled with a rise in net invisibles receipts resulted in a reduction of the CAD to USD 26.9 billion (3.1 per cent of GDP) in H1 of 2013-14 from USD 37.9 billion (4.5 per cent of GDP) in H1 of 2012-13," RBI said in a statement.

Notwithstanding a lower CAD during April-September (H1) of 2013-14, there was a drawdown of foreign exchange reserve to the tune of USD 10.7 billion as against an accretion of USD 400 million in same period last fiscal mainly due to a decline in net capital inflows under the financial account, it added.

Both the government and RBI are expecting the CAD to be below USD 56 billion in the current fiscal compared to the record high of USD 88.2 billion, or 4.8 per cent of the GDP last fiscal.

Besides, pick up in exports, the steps taken by the Reserve Bank and the government have resulted in a sharp decline in gold imports, which was one of the main contributors to high CAD last year.

The government has taken several steps, including hike in gold import duty to 10 per cent and restrictions on import of gold bars and medallions, to restrict CAD. It has also taken measures to boost exports, taking advantage of depreciating rupee.

On a Balance of Payment (BoP) basis, it said, there was a drawdown of foreign exchange reserves of USD 10.4 billion in second quarter as compared to that of USD 0.2 billion in the same period of last fiscal.

Commenting on the CAD, Finance Minister P Chidambaram said it has improved significantly on a quarter-on-quarter basis.

During the first quarter of the current fiscal, CAD widened to USD 21.8 billion or 4.9 per cent of GDP.

The lower CAD during the second quarter was primarily on account of a decline in the trade deficit as merchandise exports picked up and imports moderated, particularly gold imports, RBI said.

Gold and silver imports in April-October 2013 declined by 12.86 per cent to USD 24 billion compared to USD 28 billion in the same period last year. Gold imports have fallen from 142 tonnes in April and 162 tonnes in May. They were at 23.5 tonnes in October, compared with 11.16 tonnes in September, 3.38 tonnes in August and 47.75 tonnes in July.

India imported an estimated 835 tonnes of gold in 2012-13, a key reason for the record current account deficit (CAD) of USD 88.2 billion, or 4.8 per cent of GDP.

On a BoP basis, merchandise exports increased by 11.9 per cent to USD 81.2 billion in second quarter of 2013-14 on the back of significant growth especially in the exports of textile products, leather products and chemicals.

On the other hand, it said, merchandise imports at USD 114.5 billion, recorded a decline of 4.8 per cent in July-September period of 2013-14 as compared with a decline of 3 per cent in in the year ago period, primarily led by a steep decline in gold imports, which amounted to USD 3.9 billion.

India imported gold worth USD 16.4 billion in first quarter of the current fiscal.

As a result, it said, the merchandise trade deficit contracted to USD 33.3 billion in the second quarter of 2013-14 from USD 47.8 billion a year ago.

Net outflow on account of primary income (profit, dividend and interest) amounting to USD 6.3 billion during the period was higher than that in the preceding quarter at USD 4.8 billion. While foreign direct investment recorded net inflows of USD 6.9 billion in the said period, net portfolio investment registered an outflow of USD 6.6 billion in the wake of indication given by US Federal Reserve about the tapering of its quantitative easing programme, it said.

There was a marginal net outflow of USD 0.8 billion under equities while the debt component of net FII flows recorded a higher outflow of USD 5.7 billion, it added.

The RBI said the turnaround in export growth and decline in imports from July 2013 onwards led to a sharp improvement in the trade deficit to USD 83.8 billion in the first half of 2013-14 from USD 91.6 billion in same period a year ago.

Net inflows under the capital and financial account (excluding change in foreign exchange reserves) declined to USD 15.1 billion in H1 of 2013-14 from USD 37.0 billion in H1 of 2012-13 owing to net outflows of portfolio investment.

FM optimistic about economy; expects 5% growth in FY'14

Seeking to paint an optimistic picture of the economy, Finance Minister P Chidambaram today said the country will clock a growth rate of 5 per cent in the current fiscal notwithstanding the current stress.

"We are going through a period of stress but there is a ground for optimism...we hope things will become better in the second half of the current fiscal," he said at a press conference here.

The Finance Minister based his optimism on several factors including better-than-expected second quarter GDP growth of 4.8 per cent, improvement in current account deficit position and recovery of exports.

The growth rate in the current fiscal, Chidambaram said, is likely to be 5 per cent.

He further said: "The second quarter GDP growth rate indicates that the economy may be recovering and on a growth trajectory again...performance of Q2 is broadly on the expected line."

With the recent improvement in some important sectors like manufacturing, better performance of exports and with the measures taken by the government the economy can be expected to show further improvement, he said.

Chidambaram also expressed the confidence that the government will be able to achieve the disinvestment target of Rs 40,000 crore and contain the fiscal deficit within 4.8 per cent of the GDP.

"We are still on target. We are on course for disinvestment. We are still on track to achieve Rs 40,000 crore target," he said.

Chidambaram said the fiscal deficit has been high in the first half of the current financial year on account of front-loading of expenditure.

"The fiscal deficit at the end of any month does not give a true picture as expenditure is front-loaded and revenues are usually back-loaded. We will contain fiscal deficit at 4.8 per cent," he said.

In the first seven months (April-October) of 2013-14, the fiscal deficit, which is the difference between the earnings and spendings of government, was already at 84.4 per cent of the full-year Budget estimates.

Chidambaram said Plan Expenditure at the end of October was 48.3 per cent of BE, compared to last year's 43.2 per cent. The net tax and non-tax revenues up to October is 43.2 per cent of BE, exactly same as last year, he added.

"There is some momentum in the beginning of the second half. We will push for tax collections to speed up and once revenue collections speed up, we are confident that we will contain the fiscal deficit," Chidambaram said.

He said the government will garner little more from the sale of spectrum than the Budget target of Rs 40,000 crore.

Replying to queries on inflation, Chidambaram said the principal responsibility of taming food inflation and all instruments for that lies with state governments.

"For years state governments have simply shrug their responsibility and blamed the central government. I am not saying the central government is not responsible, but principal responsibility in dealing with food inflation lies with state government.

"They must take action against hoarding and profiteering.

They must take action on removing the barriers to trade... They must encourage people to improve supply change to bring produce to shelves," he said.

The retail inflation swelled to 10.09 per cent in October, mainly on account of high food prices.

The Wholesale Price Index (WPI) based inflation stood at 8-month high of 7 per cent in October. The rate of price rise in food articles was at 18.19 per cent.

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