Gold not villain of the piece in growing CAD
The overall merchandise trade deficit, attributable in good measure to the bigger differential between oil imports and exports, primarily caused the CAD to widen to such unprecedented level.
On its part, the net services export has lost some of its ability to mitigate the impact of the (larger) merchandise trade deficit on the CAD.
Gold imports which stood at 185% of the CAD in Q4 of 2010-11 accounted for just 47% in the CAD in Q2 of 2012-13. In 2011-12, when the government’s worries over the gold imports increased, prompting it to curb imports by increasing customs duty twice, imports of the yellow metal accounted for 74% of the CAD.
Even in terms of absolute value, gold imports have declined to $19.6 billion in first half of this fiscal compared with $29 billion in the year-ago period. So, the curbs on imports of the yellow metal and some diminishing of its lure as a safe haven investment have indeed reduced imports. This means that finance minister P Chidambaram’s statement earlier this week, hinting at further measures to make gold imports “a little more expensive” may be a bit out of place.
Instead, what is required is to spur exports, clamp down on some non-essential imports (especially of finished goods) and arrest the decline in net services exports that had until