The crash in key raw material prices and forecasts by leading agencies of a protracted bearish cycle for the global commodity market will provide some relief to policymakers struggling to contain a runaway current account deficit (CAD).
Prices of Brent crude oil, gold and coal ? which accounted for roughly 44% of India?s imports in the last fiscal ? have dropped significantly since the first quarter of the last fiscal. While the average Brent crude price has declined by 8.3% since the first quarter of 2012-13, that of gold and coal tumbled by 22.5% and 9.2%, respectively, which will help trim the CAD. This assumes that commodity prices would remain stable, or even drop further, during the rest of the current fiscal and demand doesn?t rise irrationally, as forecast by some analysts.
The average price of Brent crude oil has dropped 6% so far this quarter, while that of gold and coal have shed 18% and 3.8%, respectively.
?Commodity prices have fallen but the rupee depreciation is a worry, as imports tend to be more expensive in such a case. However, lower commodity prices will definitely help the economy. In the short term, the CAD is likely to fall,? said DK Joshi, chief economist at Crisil. ?I expect the CAD to be around 4.5% for the 2013-14 fiscal.?
The rupee has weakened by more than 8% against the dollar in 2013.
The Reserve Bank Of India will release the CAD data for the entire 2012-13 fiscal next week amid wide expectations that the deficit may have touched a record 5% of gross domestic product. This means the fourth-quarter CAD will likely be much lower than the 6.7% level witnessed in the December quarter, as the deficit has already touched 5.3% in the first three quarters of 2012-13. The current account comprises the balance of trade, net factor income such as interest and dividends, and net transfer payments.
Muted demand projections, bright supply prospects ? especially in energy due to a pick-up in exploration, extraction and refinement activities ? are to be blamed for the correction in commodities, said a Deutsche Bank report. It also forecast that commodity prices are likely to be ?in the subdued territory for years to come?.
?Since most Asian economies are net importers of commodities, a benign price outlook would unambiguously lower inflation, raise growth, and improve external balances,? said the Deutsche Bank report.
Similarly, Credit Suisse recently said the slowing Chinese economy and sluggish and fragile growth elsewhere suggest that ?the risks to the commodity complex in H2 (of 2013) are hinged to the downside?. China accounts for 25% of the world?s commodity demand.
Analysts said lower commodity price will at least help prevent a sharp upward spiral of the CAD, which may otherwise get out of control if domestic demand for gold and crude oil remains unabated.
Although coal imports have been rising at a compounded annual growth rate of 23% over the last five years, an expected 10% drop in gold imports will offset the impact, if crude oil purchases don?t shoot up.
