Weak oil to offset rising gold imports, CAD estimated at 1.4% of GDP

Current account deficit estimated at 1.4% of gross domestic product

India’s eternal love for gold has again emerged as a risk to its trade deficit, as imports of the metal surged to $5.6 billion in November from $4.2 billion in October. Gold imports averaged $2.6 billion a month between April and September. Thanks to a resurgence in gold imports, the trade deficit widened to $17 billion as imports grew 26.8 per cent. Going by the run-up in gold imports, concerns have emerged on India’s external sector and whether the current account deficit (CAD) would widen further on rising gold imports.

Economists are not particularly worried about rising gold imports for two reasons. First, the belief is that the increase is largely due to the festive season and cannot be interpreted as a secular trend. Second, gold is not the only culprit as far as India’s rising imports are concerned, say economists.

Sonal Varma of Nomura explains that excluding oil and gold, import growth rose to 27.6 per cent year-on-year (y-o-y) in November, following the slack in October (5.5 per cent y-o-y), indicative of a pick-up in domestic demand. The expansion was a result of higher fertiliser (136.6 per cent), coal (44.6 per cent) and iron and steel imports (62.8 per cent).

Exports, too, picked up in November as non-oil exports have risen considerably. However, lower crude oil imports could offset the impact of other rising imports. Compared to the year-ago period, crude imports are down 9.7 per cent to $11.7 billion, as India's crude basket hit a 50-month low of $77.58 a barrel. According to Saumya Kanti Ghosh of State Bank of India, summing up both the positive and negative impact shows the cooling crude prices would outpace the surge in gold import burden and contribute a net $5 billion in narrowing the trade deficit. This would drag CAD to as low as $30 billion, expected to be 1.4 per cent of GDP.

There is another perspective to the issue. Between 2005 and 2014, crude imports topped all other categories. However, the second big culprit is not gold. India has become a dumping ground for second-hand capital goods, imports of which stand at $650 billion cumulatively over 2005 and 2014. This also explains India's stagnating industrial production, says Ghosh. Import of capital goods is second only to cumulative crude imports at $9,501 billion. Electronics imports are the third big category at $251  billion. Gold imports at $271 billion are not the biggest contributor to India's widening CAD.