The trade numbers released today indicate export declining by 3.7% and imports registering a de-growth at 17.1%. As a result the overall trade deficit narrowed to $8.1 billion.
We believe FY14 CAD will trend at $34 bn (1.8% of GDP). In Q4FYGDP, CAD will trend lower and may be marginally negative, after incorporating the divergence in Ministry of Commerce and BOP estimates for Q4.
However, the point of concern is the decline in exports. Adding to the export woes is the fact that EU’s Generalized Scheme of Preferences (GSP) designed to support developing countries export to the European Union (EU) will now be not applicable to India. For example, as per new GSP from Jan 2014, mineral products, textiles, motor vehicles, bicycles and chemicals originating in India will no more invite preferential treatment.
There is also the concern on gold imports. Although gold imports from official channels has declined, the vast inelastic demand for gold further fuelled by high domestic prices premium, has now been made good by unofficial channels.
Finally, we believe that though the fair value of the rupee is below 60, RBI will continue to bolster reserves, and the rupee will continue to trade in the current range with gains unlikely beyond 60’.
By Dr Soumya Kanti Ghosh, Chief Economic Adviser, Economic Research Department, State Bank of India.