Gold import surge widens India's CAD to 2.1% of GDP in Sep quarter

However, level within RBI's comfort zone, with BoP in first half also looking up

A sharp rise in gold imports and a fall in export growth pushed India's current account deficit (CAD) to $10.1 billion (2.1 per cent of gross domestic product) in the financial year's second quarter, ending September, compared to $5.2 bn (1.2 per cent of GDP) for July-September 2013.

The deficit was $7.8 bn (1.7 per cent of GDP) in the first quarter ended June, according to Reserve Bank of India  (RBI) data. Despite the rise, the CAD remains within RBI's comfort zone of 2.5 per cent of GDP.

The CAD for the year's first half, April-September 2014, was $17.9 bn (1.9 per cent of GDP) as against $26.9 bn (3.1 per cent of GDP) for April-September 2013.

The balance of payments (BoP) was in positive territory. The accretion to foreign exchange reserves was $6.9 bn in the second quarter as against a drawdown of $10.4 bn in Q2 of 2013-14.

RBI said the increase in CAD was primarily on account of a higher trade deficit, contributed by both a deceleration in export growth and a rise in imports. The trade deficit expanded to $38.6 bn in July-September from $33.3 bn in the same period of FY14.

Reflecting weak global demand, merchandise export growth decelerated to 4.9 per cent in Q2 from 11.9 per cent in Q2 of 2013-14. Merchandise imports were up 8.1 per cent in Q2, against a decline of 4.8 per cent in the same quarter of 2013-14, largely due to a sharp rise in gold import.

The latter jumped 95 per cent to $7.6 bn in Q2 from $3.8 bn in the same quarter last year. The rise had continued in October, too, reaching $4.17 bn from $1.09 bn in October 2013, according to ministry of commerce data.

Rupa Rege-Nitsure, general manager and chief economist, Bank of Baroda, said the rise in CAD for Q2 was expected. Gold prices and inflation had both declined; with more disposable income, people were likely to buy more of gold.

The CAD might rise in the third and fourth quarters, too. For all of 2014-15, it is expected to be $39 bn (2.2 per cent of GDP) if the economy grows by 5.2-5.3 per cent, she added.

Net services receipts improved by 3.4 per cent in Q2, on a pick-up in telecom, computer and information services from their level a year before. The net outflow on account of primary income (profit, dividend and interest), amounting to $6.9 bn, was higher than in the corresponding quarter of 2013-14 ($6.3 bn) and from the earlier quarter ($6.7 bn).

Gross private transfer receipts at $17.4 bn were marginally up from FY14.

The BoP situation for the first half (April-September) showed improvement. A lower CAD and a rise in flows under the financial account resulted in an accretion to forex reserves by $18.1 bn, as against a drawdown of $10.7 bn in the first half of 2013-14, said RBI.