Plan Comm expects CAD to ease in 2013-14 on lower gold demand

The Planning Commission today said it is expecting the Current Account Deficit (CAD) to ease in the current fiscal with moderation in demand for gold.

"I think the turnaround on gold has happened. I think that to be reflected in smaller current account deficit this year," Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters here.

Huge gold imports have put pressure on the country's CAD, which in turn is affecting the value of rupee. Last week, the government hiked import duty on gold to 8% from 6% recently to curb demand for the precious metal.

It was the second hike in the duty in six months as gold imports touched an alarming 162 tonnes in May. The imports touched a staggering figure of $15 billion in the last two months.

The Reserve Bank has also put restrictions on banks on importing gold.

CAD is the difference between inflow and outflow of foreign currency. It is expected to be 5% in the last fiscal mainly because of surge in gold imports.

Elaborating further, Ahluwalia said: "There is certain natural demand of gold. The gold ornaments are part of people's perception of well being. But the demand of gold in last year was not natural. It has doubled. That was due to speculative demand."

According to Ahluwalia, gold is an unproductive asset and soon the the expectation among people that the gold price will rise, will change.

Asked about the revision of factory output growth rate in April to 2.3% yesterday, he replied, "It is a pleasant surprise. Obviously they have made some error. (April IIP growth rate of) 2.3% is certainly better than 2% talked about (released) earlier."

"It is still not as strong as I would like. It shows that in our system, the monthly (IIP) data that comes out, has to be taken with a bit of pinch of salt. That is why you need a little bit of more information", he commented.

He pointed out that the power situation is actually better than they (CSO) made out as there was some misrepresentation of data on electricity production.

Commenting on the the error, he said, "Yes, it is pity that these kind of errors happen. But the good news is that the economic situation is better than it seems."

Asked whether the revision indicates recovery, he replied, "Well I would like to have stronger evidence of recovery than 2.3% (IIP growth rate in April). It is view of the government that (decline in) economy has actually bottomed and now it is going to move upward."

"It is very clear that we are on a recovery path. I hope that in the next two months that recovery would be even stronger," he added.