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Business News/ Politics / Policy/  Current account deficit narrows in first quarter
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Current account deficit narrows in first quarter

CAD falls to $7.8 billion, or 1.7% of GDP, in the June quarter from 4.8% of GDP, or $21.8 billion, in the year-ago period

During the June quarter, the trade deficit contracted by 31.4% to $34.6 billion from $50.5 billion in the corresponding quarter a year ago, as merchandise exports increased by 10.6% in and merchandise imports contracted 6.5% during the same period. Photo: MintPremium
During the June quarter, the trade deficit contracted by 31.4% to $34.6 billion from $50.5 billion in the corresponding quarter a year ago, as merchandise exports increased by 10.6% in and merchandise imports contracted 6.5% during the same period. Photo: Mint

New Delhi: After the Indian economy rebounded to grow at 5.7% in the first quarter (April-June) of the current fiscal year, the Narendra Modi government received more good news on the external economy front with the current account deficit (CAD) narrowing sharply on account of lower merchandise trade deficit.

CAD, or the sum of the balance of trade and invisibles such as remittances and software earnings, fell to $7.8 billion, or 1.7% of gross domestic product (GDP), in the June quarter from 4.8% of GDP, or $21.8 billion, in the year-ago period. However, it was higher than 0.2% of GDP or $1.2 billion in fourth quarter (January-March) of 2013-14.

GDP, the broadest measure of goods and services produced across the economy, grew at 5.7% in the three months ended 30 June, the highest in 10 quarters, against 4.6% in the March quarter, driven by strong industrial recovery.

Modi led the Bharatiya Janata Party (BJP) to a spectacular win in the April-May general election, promising to boost economic growth that has languished at sub-5% levels for two years on the trot.

The new government has announced measures to boost manufacturing and foreign direct investment, including in defence equipment, railways and insurance and has resisted pressure to reduce higher import duty on gold imposed by the United Progressive Alliance (UPA) government to curb import of the yellow metal. The previous government had progressively raised the import duty on gold to 10% to control the spiralling CAD and ease pressure on the rupee.

Gold imports declined 57.2% to $7 billion in June quarter, significantly lower than $16.5 billion during the same quarter a year ago but higher than $5.3 billion in the preceding March quarter of 2013-14.

Finance secretary Arvind Mayaram on 21 August said the government is confident of containing CAD to below 2.5% of GDP in 2014-15, higher than the 1.7% of GDP in 2013-14. “It will be higher only because of higher imports of intermediate products such as raw material which clearly means uptick in manufacturing sector," he added.

During the June quarter, the trade deficit contracted by 31.4% to $34.6 billion from $50.5 billion in the corresponding quarter a year ago, as merchandise exports increased by 10.6% in and merchandise imports contracted 6.5% during the same period.

Net services receipts improved marginally in June quarter growing by 1.2% to 17.1% on account of higher exports of services.

Buoyed by the sharp surge in inflows, under both the portfolio ($12.4 billion) and FDI (foreign direct investment) route ($8.2 billion), capital account recorded a surplus of $19.8 billion in the June quarter.

In all, there was net accretion of $11.2 billion in India’s foreign exchange reserves during the first quarter of the current fiscal year, compared with a drawdown, to the tune of $0.3 billion in the same period last year.

The portfolio flows to the country surged after investor sentiment surged following the BJP’s victory in the general election, more than offsetting the outflow on the current account.

Net outflow on account of primary income, profit, dividend and interest amounted to $6.7 billion in first quarter, around 38% higher than the $4.8 billion reading during same period last year. Specifically, outflow under intellectual property charges or royalty, mostly by Indian subsidiaries of multinational companies to their parents, went up 22% during the June quarter.

While marginal increment in outflows on account of dividend and profit sharing is a trend for an emerging economy, Monday’s reading reiterates concern with respect to royalty payments, said Shubhada Rao, chief economist at Yes Bank.

“While this item has still not become a large structural component to be worried about, we must remain watchful of such outflows in a scenario when overall traction with regards to invisible receipts come under doubt," she said.

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Published: 01 Sep 2014, 07:30 PM IST
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