BackBalance of payments pressure eases in Q3
India's current account deficit narrows to 0.9% of GDP in December quarter, aided by rising exports and fall in gold imports
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New Delhi: In a signal that pressure on the external sector is easing, India’s current account deficit narrowed to a four-year low in the fiscal third quarter, aided by a decline in gold imports and revival of exports.
The deficit was at 0.9% of gross domestic product (GDP) in the three months ended 31 December, data released on Wednesday by the Reserve Bank of India (RBI) showed.
The current account, an important measure of economic health, is the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers.
Narrowing of the deficit was helped by curbs placed on gold imports by the government, which raised taxes on purchases of the metal overseas, and by a revival of exports after a prolonged slowdown. It has reduced pressure on the rupee, which has recovered to around 61-62 per dollar level after falling to an all-time low of 68.85 in August.
The current account deficit narrowed from 1.2% of GDP in the preceding quarter ended September.
The deficit at the end of the third quarter in the previous year was equivalent to 6.5% of GDP.
In the three months ended December it was at $4.2 billion, down from $31.9 billion a year ago, according to the balance of payments (BoP) data released by RBI.
India aims to restrict its current account deficit to $45 billion in the current fiscal year, finance minister P. Chidambaram said in his interim budget speech last month.
The government will review the curbs on gold imports after a clearer picture emerges on the current account deficit for the full year, Chidambaram said on Wednesday at a press briefing.
In the first nine months of the fiscal year, the current account deficit was $31.1 billion, or 2.3% of GDP, against $69.8 billion, or 5.2% of GDP, in the year-ago period.
Economists said imports are likely to rise in the next fiscal year as economic growth picks up.
“As growth improves, we will see imports rising like that of plant and machinery. However, if the positive policy interventions are effective, coal imports should reduce," said Anubhuti Sahay, senior economist at Standard Chartered Bank. “We also do not expect too much of an uptick in oil prices."
“With growth in US and Europe picking up, exports growth should continue," she added.
India’s trade deficit in the October-December quarter fell to $33.2 billion in the third quarter of 2013-14 from $58.4 billion a year ago. While exports rose 7.5% to $79.8 billion riding on good growth in exports of engineering goods, readymade garments, iron ore, marine products and chemicals, imports declined by 14.8% to $112.9 billion due to the decline in gold imports.
Imports of the precious metal fell sharply to $3.1 billion from $17.8 billion, as high customs duty lessened demand. The government had in the past one year progressively raised the import duty on gold to 10% to control the spiralling current account deficit and ease the pressure on rupee. The central bank also put curbs on banks on loans against gold coins.
The Indian rupee managed to hold its own against the dollar in January even after the US Federal Reserve started its tapering programme even as currencies of other countries like Argentina, South Africa and Turkey plunged.
This quarter, capital inflows were able to finance the deficit. While net foreign direct investment inflow was at $6.1 billion, portfolio investment was at $ 2.4 billion in the quarter.
Within portfolio investment, the debt segment showed net outflows, offset by higher net inflows of $6.2 billion into equities. There was an accretion of $19.1 billion to foreign exchange reserves in the quarter, compared to a drawdown of $10.4 billion in the preceding quarter.
The full-year current account deficit should be around 2% of GDP, or at $35-37 billion. Aditi Nayar, senior economist at rating agency Icra Ltd, said in a note. Current account deficit for 2012-13 was at a record 4.8% of GDP.
The trade deficit may come under renewed pressure when the economy starts to improve.
“Even if gold imports restrictions continue, the current account deficit may be as high as $45 billion in FY15. Any revival in domestic consumption or investment impulses would boost growth of non-oil, non-gold imports in FY15, which have undergone a contraction in the current year. Moreover, the coal import volume is set to rise, exerting pressure on the trade deficit," Nayar said.
Bloomberg contributed to this story.
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