India's current account deficit for Q2 shoots up at 5.4% GDP

Balance of payments slips into negative

India’s current account deficit (CAD) for the second quarter ended September 2012 rose sharply to $22.3 billion from $18.9 billion in Q2 of a year ago higher pace of imports and moderating exports growth.

As proportion of Gross Domestic Product (GDP), the CAD shot up to unsustainable level of 5.4% for Q2 of Fy13 from 4.2% for Q2 FY12.  It is more than double what Reserve Bank of India considers sustainable level (2.5% of GDP) when economy is growing at slow pace.

The slow pace of economic growth adversely affected the current account.

The CAD for Q1 of FY13 was 3.9%, down from 4.5% in Q4 of 2011-12.  The trade deficit for Q2 of FY13 stood at $48.3 billion, up from $44.5 billion in July-September 2011, RBI said a statement.

 

The current account deficit for April-September 2012 was $38.7 billion (4.6% of GDP) up from $36.3 billion (4%) a first half of 2011-12. It reflects slowdown in economic growth and significant depreciation of rupee.

The balance of payment situation also slipped into negative during the Q2. There was net drawdown of foreign exchange reserves of $0.2 billion as against small accretion of $0.3 billion in Q2 of 2011-12. In June quarter 2012 there was net accretion to foreign exchange reserves of $0.5 billion. 

Brinda Jagirdar, head of economic research, State Bank of India said the sharp rise merchandise deficit reflecting higher pace of exports and moderation in exports. The services exports and remittances are not adequate to offset the merchandise imports.

The financial stability report (released on December 28), said the hike in import duties the demand for gold had dampened in June 2012. However, demand in the September 2012 quarter picked up significantly. It was higher than the average of last 5 years (September 2007 to June 2012).

The Indian economy grew 5.3% in Q2 of FY13 as against 6.7% a year ago. During Q1 of Fy13, the economy had expanded at 5.5%. RBI has estimated a GDP growth of 5.8% for current financial year.