Home / Market / Mark-to-market /  Rising imports pose threat to current account deficit

The fall in the current account deficit in the four quarters till June 2014 was mainly owing to a couple of factors—a government clampdown on gold imports and general economic weakness which dented non-gold imports. Now, both factors are reversing and it is but natural that the deficit is widening again.

In the September quarter, the current account deficit widened to $10.1 billion compared with $5.1 billion a year ago. This increase of $5 billion can be entirely attributed to an increase in the merchandise trade deficit, which rose $5.26 billion.

The widening of the merchandise trade deficit is explained by two things. One, export growth decelerated to 4.9% in the three months ended September from 10.6% in the June quarter and 12% a year ago.

Second, overall import growth accelerated to 8.1%. This was mainly driven by a dramatic increase in gold imports, perhaps because of the government allowing some trading houses to import gold under the so-called 80:20 scheme. After falling for four straight quarters, the imports of non-monetary gold almost doubled in the three months ended September. Then again, a nascent economic recovery has led to a rise in non-gold imports which increased 4.8% in July to September, the highest in seven quarters.

The trend in gold and non-gold imports poses a threat to the current account deficit in the coming quarters as well. The government rolled back the 80:20 scheme in November. Even though gold prices have come down and real rates in India rising due to lower inflation, imports should continue to rise.

The rise in non-gold imports is also likely to accelerate. Recent data such as the HSBC purchasing managers’ indices and electricity production—which rose the highest in five years so far in 2014-15—indicate that the recovery is underway. Organisation for Economic Cooperation and Development’s (OECD’s) composite lead indicator suggests growth momentum will pick up in India.

As past economic recoveries show, such an increase in growth is typically accompanied by a rise in imports. If there is any relief to be expected, that can come only from falling crude oil price. Petroleum and its products accounted for one-third of India’s imports in the last couple of years. At the same time, falling growth momentum in the euro zone and Japan do not augur well for exports.

Falling crude oil prices, however, can have a side effect. They can dampen investment in West Asian countries and dent remittances to India. This is notwithstanding the 32% increase in worker remittances seen in the September quarter. That will add further pressure to the current account deficit.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Recommended For You
Edit Profile
Get alerts on WhatsApp
Set Preferences My ReadsFeedbackRedeem a Gift CardLogout