Some cause for hope on CAD control

Gold, coal and metal scrap imports likely to soften, textile export rising; concern, though, on edible oil and jewellery

There is more than one element of comfort when viewing the current account deficit (CAD) this financial year and the next. Gold import this year is expected to remain no more than half of 2012-13’s $53.8 billion and, as a result, the CAD will remain around $40 bn or two per cent of gross domestic product (GDP).

Gold apart, several other elements that were pressure points in the past have been tapering, say senior economists. Coal import is rising in quantity terms but a softer price outlook might keep that under control. Metal scrap import is likely to come down with the iron mining scene improving. The possibility of resumption of mining in Goa improves the export scenario and the larger effect might be seen in 2014-15. The state government had held two auctions for ore, in which exporters participated.

In 2013-14, capital goods machinery import has come down but that has more to do with industrial growth. Fertiliser import is no more now in the top-10 import commodities in terms of value, due to lower prices.

In the import bill, coal (both thermal and coking) has the largest chunk in the category of fuel and raw materials, after crude oil. However, coal prices have fallen, compensating for the rise in coal import quantity; for FY15, too, the price outlook is soft. Thermal coal is 70 per cent of total coal import and those for the annual contract coming into force from April are being negotiated 15-20 per cent lower than last year’s price.

According to Deepak Kannan, managing editor, thermal coal, at Platts, the premier global watcher on energy prices, “Coal India’s production will likely miss the target this year and imports are expected to increase. The Indonesian market has eased and will likely remain under pressure next year as well.” The import quantity has been rising — 107 mt in 2011-12; 138 mt in 2012-13; 155 mt in 2013-14.

“In contrast to some other emerging markets, India's external adjustment is both substantial and impressive, and policymakers deserve much credit. But it’s one thing to have the CAD at two per cent of GDP when growth is below five per cent and domestic demand is so depressed. Instead, we need a CAD at around these levels when domestic demand strengthens and growth returns towards seven per cent. And, for that, improving productivity and competitiveness remains key,” said Sajjid Chinoy, chief India economist, JP Morgan.

Edible oil (around $10 bn) and iron and steel scrap are among other major items in the import bill. Scrap imports have been rising due to the iron ore scarcity but is coming under control as the latter scene improves.

Agreeing that gold and coal imports are coming under control, Madan Sabnavis, chief economist, CARE Ratings, said some issues need to be watched. On the fall in capital goods imports, he said it reflected the slowing in Indian industry. “But, import of ores and scrap is one category that needs to be monitored, as it is high and rising. Edible oils import has to be monitored, especially if there are concerns on monsoons. Development of the El Niño (weather condition) and its possible effect on India can cause this component to go up, considering we import 45-55 per cent of our edible oil requirement.”  

Textile exports have also turned around. It was only $32 bn in FY13; this year, it is expected to exceed $40 bn and the FY16 target is $55 bn. Iron ore export has been an issue. Three years earlier, it was $9 bn; now, it is hardly 15 per cent of that. However, hopes of exports resuming from Goa could mean some good news early next year.

Madan said a slowing in export of jewellery should be looked at closely by the government, since curbs on gold import have affected exporters. “Typically this should be rising. This calls for some element of rationalisation here,” he said.