Current account deficit: Once a CAD, now a hero

Mar 06 2014, 18:33 IST
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CAD for the third qtr of the fiscal narrowed sharply to just $4.2 billion or 0.9% of GDP. CAD for the third qtr of the fiscal narrowed sharply to just $4.2 billion or 0.9% of GDP.
SummaryCAD for the third quarter of the fiscal narrowed sharply to just $4.2 billion or 0.9% of GDP.

On a day the Election Commission’s announcement of poll schedule virtually diminished it, the UPA government was greeted by the Reserve Bank of India’s (RBI) sanguine balance of payments (BoP) data for the December quarter. The RBI data revealed that the current account deficit (CAD) for the third quarter of the fiscal narrowed sharply to just $4.2 billion or 0.9% of gross domestic product (GDP).

Wednesday’s data showed the CAD for this fiscal would be even better than finance minister P Chidambaram’s prediction in the recent interim budget. The CAD, which stood at a worrisome $88 billion or 4.7% of GDP last fiscal, the minister had said, would be contained at $45 billion (below 2.5% of GDP) this fiscal.

The contraction in trade deficit coupled with a rise in net invisible receipts reduced the CAD in the first nine months of FY14 to $31.1 billion or 2.3% of GDP. This, coupled with the January trade deficit of $9.9 billion (which was lower than the average in the preceding three months) and the anticipated robustness in net invisible receipts in the last quarter, could take the CAD at March-end substantially below Chidambaram’s forecast.

The RBI had pegged the CAD for 2013-14 to be below 2.5% of GDP.

A comfortable $8.4 billion was added to the foreign exchange reserves in April-December this year, thanks to robust accretion of $19.1 billion in the third quarter (there was a draw-down of $10.4 billion in the September quarter). This gave credence to Chidambaram’s assertion in the interim budget that $15 billion would be added to the country’s foreign exchange reserves by the end of the financial year. Last year too, despite the high CAD of $88 billion, $3.8 billion was added to forex reserves.

But analysts were concerned about the fact that the reduction in the CAD in the third quarter was principally due to a steep 14.8% decline in imports to $112.9 billion. Such contraction in imports has been unheard of in recent history and reflects the investment torpor in the economy. Imports have been showing negative annual growth for each month since June 2013 to January 2014.

The decline in imports allowed merchandise trade deficit to contract an annual 43% to $33.2 billion in the third quarter.

Of course, also of help was a steep (and desired) fall in gold imports — helped by tax and non-tax curbs, the yellow metal’s imports stood at just

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