India’s current account deficit widens to 2.1% of GDP

New Delhi: India’s current account deficit (CAD) widened to a five-quarter high of 2.1% of gross domestic product in the second quarter ended 30 September, as exports growth slowed and imports increased because of a rise in demand for gold.

During the second quarter last year, CAD was 1.2% of GDP and during the preceding first quarter of the current financial year, it was 1.7% of GDP.

Merchandise export growth during the September quarter slowed to 4.9% from 11.9% during the same quarter a year ago, while merchandise imports increased by 8.1% against a decline of 4.8% the second quarter of 2013-14, largely due to a sharp rise in gold imports. Net gold imports increased to $7.6 billion in the second quarter from $7 billion in the previous quarter.

Reserve Bank of India (RBI) deputy governor H.R. Khan, however, said last week that the central bank is “reasonably comfortable” with the current account deficit scenario because of lower oil prices. Brent crude oil on Monday fell below $68 per barrel, a new five-year low, on predictions that oversupply would keep building until next year after the Organization of Petroleum Exporting Countries decided not to cut output.

The Union government eased gold imports last month by removing a restriction that required traders to export 20% of the precious metal they bought overseas—a move that had been aimed at cutting the CAD. The so-called 20:80 norm was introduced in August last year, together with a duty of 10%, at a time when the deficit had widened to a record and gold imports had been surging.

Citigroup in a report last month said the sharp correction in commodity prices over the last three months bodes well for domestic macroeconomic indicators with CAD and inflation to be the key beneficiaries. “A 10% fall in commodity prices could potentially result in reducing the CAD by $14-15 billion and CPI (Consumer Price Index) inflation by more than 20 basis points,” it added. A basis point is one-hundredth of a percentage point.

Aditi Nayar, senior economist at Icra Ltd, said the widening of the CAD is in line with expectations, following the rise in gold and non-oil non-gold imports and subdued growth of merchandise and services exports. “Recent indicators reiterating a bleak growth outlook for the euro zone and Japan suggest a muted real growth of Indian exports in the remainder of this fiscal,” she added.

Nayar said following the sharp correction in the price of the Indian crude oil basket, she expects net oil imports to decline to $85 billion in 2014-15 from $101 billion in 2013-14, barring a price spike on account of factors such as resurgence in geopolitical tensions.

While the volume of gold imports may ease post the festive season, Nayar said the withdrawal of the 20:80 scheme may arrest the extent of correction in the quantity of imports.

Madan Sabnavis, chief economist at CARE Ratings, said he expects CAD to remain slightly elevated in the range of 2-2.4% of GDP (gross domestic product) for the next two quarters. “The denominator, that is GDP growth, will be pressurized by both lower farm growth and government expenditure. Further, low inflation will diminish the nominal value of GDP,” he added.

GDP growth decelerated to 5.3% in the September quarter from 5.7% in the June quarter, due to a sharp slowdown in manufacturing activity in the economy.

During the September quarter, the trade deficit rose by 16% to $38.6 billion from $33.3 billion a year earlier.

Net services receipts improved marginally in September quarter, growing by 3.2% to 19% on account of higher exports of services.

Buoyed by the surge in portfolio inflows of $9.8 billion in the September quarter, while foreign direct investment inflows remained stable at $8 billion, the capital account recorded a surplus of $5.6 billion in the September quarter.

In all, there was net accretion of $6.9 billion in India’s foreign exchange reserves during the second quarter of the current fiscal year, compared with a drawdown to the tune of $10.4 billion in the same period last year.

The portfolio flows to the country surged after a rise in investor sentiment following the Bharatiya Janata Party’s victory in the general elections, more than offsetting the outflow on the current account.