Added worry on external payments situation

CAD at 5.4 % of GDP in September quarter sure to concern rating agencies

The current account deficit (CAD) for the quarter ended September was at an all-time high of 5.4 per cent of gross domestic product (GDP), owing to a widening trade deficit and the slowing economy.

In the year-ago period, the CAD stood at 4.2 per cent of GDP. For the first quarter of this financial year, it stood at 3.9 per cent of GDP, against 4.5 per cent in the last quarter of 2011-12.

Economists said this would lead to global rating agencies taking a closer look at the health of India’s external sector. Madan Sabnavis, chief economist at CARE Ratings, said CAD for the September quarter had come as a shocker. The country’s balance of payments, too, slipped into negative territory, with drawdown of $0.2 billion from foreign exchange reserves in the quarter, against accretion of $0.3 billion in the year-ago period. In the June quarter, net accretion of $0.5 billion to foreign exchange reserves was recorded.

DETERIORATING STATE Current account deficit
	Q2 FY12	Q2 FY13
Merchandise trade balance	- $ 44.5 bn	- $ 48.3 bn
Services (net)	$ 14 bn	$ 15.6 bn
Primary income*	-$ 4 bn	-$ 5.6 bn
Secondary income#	$ 15.6 bn	$ 16.1 bn
Current account balance	-$ 18.9 bn	- $ 22.3 bn
CAD as % of GDP	4.20%	5.40%
Financial and capital balance	$ 19 bn	$ 24.2 bn
-Sign signifies deficit; CAD: Current account deficit; GDP: Gross domestic product; * Compensation of employees plus investments; # Personal and other transfers (remittances)                                                                          Source: RBI

CAD for the quarter ended September rose to $22.3 billion from $18.9 billion in the year-ago period, owing to higher imports and moderating growth in exports. The trade deficit for the quarter stood at $48.3 billion, against $44.5 billion in the year-ago period, the Reserve Bank of India said.

Aditi Nayar, economist with rating agency Icra, said the deficit was much higher than the earlier estimate of about four per cent. Though the situation might improve in the third and fourth quarters, CAD for FY13 is expected to exceed 4.2 per cent of GDP (reported for FY12). Imports of oil and gold were high in the September quarter, though these were lower compared to the first half of 2011-12. In the third and fourth quarters, imports may remain sticky, Nayar said. Gold imports declined to $19.57 billion in the April-September period, against $28.64 billion in the corresponding period last year.

The CAD for April-September was $38.7 billion (4.6% of GDP), higher than $36.3 billion (four per cent of GDP) in the first half of 2011-12, indicating a slowdown in economic growth and a significant depreciation in the rupee.

The economy grew 5.3 per cent in the second quarter, compared with 6.7 per cent in the year-ago period. For the quarter ended June, growth stood at 5.5 per cent. RBI has estimated GDP growth for the current financial year at 5.8 per cent.