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Business News/ Market / Mark-to-market/  Decoding the fall in the current account deficit
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Decoding the fall in the current account deficit

$14 billion drop in current account is almost entirely attributable to reduction in merchandise trade deficit

The fall in the current account deficit in the last couple of quarters owes a lot to economic weakness. Photo: ReutersPremium
The fall in the current account deficit in the last couple of quarters owes a lot to economic weakness. Photo: Reuters

The fall in the current account deficit in the last couple of quarters owes a lot to economic weakness. In the June quarter, current account deficit of $7.8 billion is narrower by nearly $14 billion from the year-ago number. This drop of $14 billion is almost entirely attributable to the reduction in the merchandise trade deficit.

The goods trade deficit fell by $15.8 billion. That in turn was owing to a couple of factors. One, exports increased $7.8 billion, or 10.6%, from a year ago. Second, imports fell by $8 billion, or 6.5%.

To be sure, the fall in gold imports was a major factor for the decline in overall imports. Non-monetary gold imports fell by more than half, or $9.5 billion from a year ago. Despite that non-gold imports were still weak, growing about $1.4 billion, or 1.3% from a year ago.

Unfortunately, such a state of affairs cannot be sustained. Gold imports cannot go down by such an extent in the remaining part of this financial year. The government has allowed some trading houses to import the precious metal under the so-called 80:20 scheme. Moreover, the last three quarters of 2013-14 anyway saw suppressed gold imports in the range of $3-6 billion.

Non-gold imports cannot continue to be so weak if the economy is recovering. In fact, the weakness in non-gold imports seems to already have bottomed out with slight signs of growth in the June quarter; they declined by 4.4% in the March quarter and 3.4% in the three months to December. It’s important to also note that crude oil prices are unlikely to decline more from here on; thus no relief can be expected from that front.

What does history tell us? Imports usually start rising fast as a recovery happens. In 2002-03, imports rose by 14.5%. Again in 2010-11, when the economy spiked up for a brief while, imports grew nearly 28%.

If there were even a 10% growth in non-gold imports, with everything else remaining the same, the current account deficit for the June quarter would have been $17.2 billion, or 3.7% of GDP. This is not to say that the current account deficit for the whole year will reach these levels. Indeed, given the depressed imports in the June quarter, even a 10% growth for the rest of the fiscal year means that the deficit would be low. But it does highlight the dangers to the current account deficit levels even with a nominal spike in non-gold imports, as the recovery takes hold.

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Published: 02 Sep 2014, 06:49 PM IST
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