Current account deficit widens, but provides glimpse of hope

Market players say gold import curbs, higher exports will help narrow gap in coming quarters

The current account deficit (CAD) for the quarter ended June widened to $21.8 billion, which was marginally better than street expectations, but experts said the figure could narrow substantially in the subsequent quarters on the back of gold import curbs. The curbs would provide relief to the domestic currency which has depreciated 15.4 per cent against the US dollar in the current financial year.

According to data released by the Reserve Bank of India (RBI), the current account deficit rose to $21.8 billion or 4.9 per cent of GDP for April-June 2013 due to a rise in imports (especially of gold) and shrinking exports. The CAD for April-June 2012-13 was $16.9 billion, 4 per cent of GDP.

"The latest figures give us greater confidence that the CAD could be less than $10 billion in the third quarter and we see a distinct possibility that it will fall below $60 billion, or 3.3 per cent of GDP, in FY 13-14," said Siddhartha Sanyal and Rahul Bajoria, economists at Barclays. Market participants are drawing comfort from the curbs on gold imports, fall in non-oil imports and higher exports that will help the CAD narrow down in the coming quarters.

The CAD for the previous financial year touched a record high of 4.8 per cent of GDP, higher than the RBI's comfort zone of 2.5 per cent. In fact, the deficit was higher than the tolerance zone for three consecutive years. Though it is likely to remain high this year too, it is expected to come down substantially from the previous year.

Samuya Kanti Ghosh, chief economic advisor, State Bank of India, said the CAD for Q2 (ended September 2013) could decline to $10 billion on the back of a drop in gold imports and better exports.

The balance of payments (BoP) moved into negative territory due to a draw-down of $300 million from forex reserves in the June quarter. In April-June 2012 there was a net accretion to forex reserves of $500 million. The balance of payments for the June quarter this fiscal stood at $346 million versus a surplus of $2.68 billion in the March quarter. A lower trade deficit and a higher flow of dollars from Indians living abroad to benefit from a weak rupee will lead to an improvement in the second quarter. But India's external sector continues to be vulnerable, warns D K Joshi, chief economist at CRISIL.

In a research note, CRISIL said though there were signs of hope, the nature of improvement in the CAD was unsustainable.

The bulk of the correction was from lower gold import -which was forceful - and from other non-oil imports, which naturally slowed with domestic demand, it said. As and when the curbs on gold import are gradually withdrawn, import demand could escalate unless alternative investment instruments offering positive real returns are available.

The merchandise trade deficit in Q1 2013-14 widened to $50.5 billion from $43.8 billion in Q1 last fiscal. The improvement in the global geo-political situation may bode well for crude oil prices. The US-Iran dialogue and receding strife in Syria may help avoid a flaring up of oil prices, says Devendra Kumar Pant, chief economist with India Ratings.

Referring to the trend on the services trade front, the RBI said the pace of services exports moderated to 2.1 per cent ($36.5 billion) from 6.1 per cent (35.8 billion) in Q1 last fiscal. Imports of services shrank by 5.1 per cent ($19.7 billion) as against growth of 19.3 per cent ($20.8 billion) in Q1of FY13. The accruals on account of services were higher at $16.9 billion as compared to $15 billion in the year-ago period. The net secondary income, mainly comprised of remittances from overseas Indians, declined slightly to $16.7 billion. In Q1 last fiscal, the secondary income was $16.8 billion.