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

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SummarySharp fall in trade deficit could help wipe out CAD in Q2

Aided by a policy-enabled steep fall in gold imports, India’s 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, Wednesday’s trade data has prompted the Prime Minister’s 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. Crisil’s 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

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