Trade deficit in India is likely to contract by nearly a fifth for the first time in over two years on the back of falling imports of gold into the country.
Ajay Sahai, director general, Federation of Indian Export Organisations (FIEO) said, “Much of the gold was imported for creation of assets in the last financial year. The stock market and the real estate sector were not doing well. Now with the markets expected to perform better, gold imports are likely to decline by at least 50 per cent by the end of the year.”
In 2011-12, 969 tonnes of gold valued at around $54 billion were imported into the country. The import of gold is estimated decline by $25-30 billion in the current financial year.
“This fall in gold imports would help in containing the trade deficit at $150 billion in the current fiscal”, added Sahai. Gold and petroleum imports had led to a ballooning of trade deficit last financial year to a record $185 billion, accounting for nearly 10 per cent of GDP.
With gold prices reaching record levels in recent months and the government imposing various kinds of curbs on it, imports of gold and silver declined by around 46 per cent to $2.6 billion in August this year. Data available with the Ministry of Commerce & Industry show in the first five months of the fiscal, gold and silver imports dropped by 62.5 per cent to $16 billion.
Sahai informed, “While import of silver may increase for industrial purposes on economic revival, gold imports have already dropped by 38 per cent between April and August this year. The import of coal has also been under control but much will depend on the allocation of coal available domestically for power generation.” In August, import of coal had increased marginally to $1.7 billion as compared to $1.5 billion registered in the same month last year.
The declining imports this year may lead to containing of trade deficit in the current financial year. While trade deficit widened marginally to $15.7 billion in August, for the first five months the deficit fell to $71.1 billion as compared to $76.2 billion in the year-ago period. However, it should be noted that contraction in trade deficit came amid a scenario when both exports and imports fell.
In the previous two financial years, trade deficit has risen year-on-year, which signifies the steep decline in demand overseas, which compressed exports growth faster than imports, required for the expansion in the Indian economy.
High trade deficit had pushed India's current account deficit (CAD), which also include net trade in services besides some net investment income, to record 4.2 per cent of GDP. High CAD becomes a tricky issue since at the time of low capital inflows due to crisis in Euro zone and policy inaction in the early part of this fiscal, financing CAD becomes difficult.
