India’s current account deficit (CAD) in the first quarter of FY14 was $21.8 billion or a disquieting 4.9% of the GDP (which expanded at a four-year low of 4.4% in the quarter), Reserve Bank of India (RBI) data showed on Monday. Policymakers and analysts, however, said that was little reason to fret since things had started looking up right since May and the full-year deficit, they predicted, would be low enough to leave a few billion dollars to be absorbed into the country’s forex reserves after safely funding CAD.
Last year, CAD stood at a record $88.2 billion; still, there was an accretion of $3.8 billion to reserves. The situation would be much more sanguine this year, the finance ministry believes, and pegs the CAD for FY14 to be much lower than $70 billion or 3.7% of GDP estimated earlier. To drive home the point, ministry officials pointed to a significantly lower merchandise trade deficit for July-August ($26.4 billion as against $50 billion for Q1), a 95% slump in gold imports in August likely heralding a trend (gold imports accounted for a record 61% of the CAD last fiscal and imports of the yellow metal soared to a record 300 tonnes in April-May this fiscal), a likely pick-up in inflows under the head of invisibles. Steps being taken to curb the oil import bill — originally estimated at $160 billion for the full year — and increased capital inflows are expected to help too.
Analysts say CAD in Q2FY14 could come down sharply thanks to a steep decline in trade deficit. Some of them forecast the CAD for the quarter to be less than $10 billion. “Next quarter, CAD will be much lower because of lower gold imports and a pick-up in exports,” said DK Joshi, chief economist, Crisil.
“We expect FY14 CAD at $72 or 3.9% of GDP,” said Joshi.
Credit Suisse had earlier estimated the FY14 CAD at $35 billion, pinning hopes on higher invisibles especially services exports.
“Excluding the increase in gold imports of $7.3 billion in Q1FY14 over the corresponding quarter of the preceding year, CAD would work out to $14.5 billion, which translates into 3.2% of GDP,” RBI said in a statement. While merchandise exports fell 1.5% year-on-year to $73.9 billion in Q1, imports rose 4.7% to $124.39 billion leading to a higher trade deficit of $50.5 billion. The gap in merchandise trade was partially offset by a