CAD for Q1 to dip below 3.5%

To stay above sustainable level in FY13

After continuously witnessing deterioration in the external sector, India may report some improvement in its current account deficit (CAD) for the first quarter ended on June 30.

The drop in gold imports and soft global oil prices could bring down CAD to below 3.5 per cent of gross domestic product (GDP) in the first quarter from the peak of 4.5 per cent in the fourth quarter of 2011-12, according to estimates by economists.

The Reserve Bank of India will release data on balance of payments for the June quarter tomorrow. The trade deficit was $40 billion in the first quarter against $35.4 billion in April-June 2011. During January-March, it was $46.4 billion.

DEFICIT DOSSIER CAD trend in 2011-12 (as % of GDP)
	Q1	Q2	Q3	Q4
Absolute  amount  in $ bn	15.8	16.9	19.6	21.7
As % of gross domestic  product	3.4	3.7	4.3	4.5
Source: RBI and SBI

Brinda Jagirdar, general manager and head of economic research, State Bank of India, said the slowdown in economic growth and a dip in investment demand affected trade. CAD might dip to 3.2-3.3 per cent. While there is improvement on the current account front, the balance of payments will continue to show strain due to a sharp fall in foreign capital investment flows, she said.

The net foreign investment — foreign direct investment plus net portfolio Investment — coming to the country was a mere $1.98 billion in April-June, compared to $11.5 billion a year ago. Reflecting the weak situation on balance of payments, the trend of drawdown on foreign exchange reserve could also be seen in the first quarter, CARE chief economist Madan Sabnavis said.

Widening CAD and inadequate capital flows led to a net drawdown of foreign exchange reserves of $5.7 billion during the March quarter. It was much higher at $12.8 billion in the quarter ended December 2011.

RBI has said with lower economic growth, the sustainable level of CAD is around 2.5 per cent of GDP. CAD is likely to stay this level. Though the merchandise trade balance in the first quarter of 2012-13 narrowed, trade in services showed deterioration. In net terms, services exports at $12.9 billion in the June quarter were down 22 per cent over those in the year-ago period. This indicates CAD risks remain.

The Prime Minister’s Economic Advisory Council has estimated CAD to be about 3.6 per cent for 2012-13. It was 4.2 per cent for FY12.

Aditi Nayar, senior economist with rating agency Icra, said people kept away from buying (importing) gold in the first half. This trend might reverse in the second half (from October — beginning of festive season). Plus, there could be pressure from a rise in oil prices.

Going forward, the focus should be on financing and compressing CAD to manageable levels to cut risks of external shocks disrupting economic growth. CAD has been managed by improving debt inflows.

There is a need to step up non-debt creating inflows, especially in form of foreign direct investment, RBI says.