The worsening of the current account deficit to a record $22.4 billion or 5.4% of the GDP in July-September had much less to do with the gold imports than widely perceived.
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 recently stood the country in good stead in maintaining CAD at comfortable levels.
Even as a proportion of merchandise trade deficit, gold imports were 21.6% during the first half of 2012-13 as against 30.5% in 2011-12 and 26% in 2010-11. As a fraction of trade deficit, oil imports, on the other hand, inched up to 88.5% during H1 this year compared with about 81% in previous two years.
During April-September, service exports grew just 5.4% year-on year, slowing from 7% growth in 2011-12 and 37.5% in 2010-11. Net export of services, in fact, rose only marginally to $15.6 billion in July-September this year from $13.9 billion in the corresponding quarter a year ago.
On Tuesday, Chidambaram said: “Gold imports constituted a substantial chunk of imports and is a huge drain on the current account. Suppose gold imports had been one half of the actual level, that would