Lower gold imports, oil bill pull current account deficit down

At $300 million in Q1FY17 as against $6.1 bn in the same period of last year.

By: ENS Economic Bureau | Mumbai | Published:September 22, 2016 3:17 am
cad, current account deficit, reserve bank, india cad, india current account deficit, india import and export difference, india exports, india inports, latest news, business, india business, india news According to the Reserve Bank of India, the contraction in the CAD was primarily on account of a lower trade deficit of .8 billion than in Q1 of last year at .2 billion and in the preceding quarter .8 billion.

Contrary to expectations of a surplus, India’s current account deficit (CAD) has amounted to $300 million, or 0.1 per cent of GDP, in the first quarter of 2016-17 as against $6.1 billion (1.2 per cent of GDP) in the same period of last year mainly due to the fall in gold imports and lower oil import bill.

According to the Reserve Bank of India, the contraction in the CAD was primarily on account of a lower trade deficit of $23.8 billion than in Q1 of last year at $34.2 billion and in the preceding quarter $24.8 billion. On a balance of payment (BoP) basis, merchandise imports declined sharply (by 11.5 per cent) vis-à-vis merchandise exports (which declined by 2.1 per cent), leading to a lower trade deficit in Q1 of 2016-17. Gold imports declined to $3.9 billion from $ 7.5 billion in the first quarter of last year. The RBI said private transfer receipts, mainly representing remittances by Indians employed overseas, also declined possibly due to the fall in oil prices.

Aditi Nayar, senior economist, ICRA, said, “The sharp fall in gold imports and continuing benefit from a lower oil import bill limited the current account deficit at a marginal $0.3 billion, offsetting the drag exerted by the narrower surplus of services trade and lower remittances.” With crude oil prices likely to remain range-bound, the extent of revival in gold imports during the remainder of this fiscal, particularly during the festive season, would critically impact the size of the current account deficit. Analysts and research firms were expecting a surplus in the first quarter. Now they expect the country to post a surplus in the second quarter of the fiscal.

“The continuous decline in earnings from service exports over the last 8 months is a cause for concern. Capital inflows (FDI, FII, NRI deposits and ECBs) improved slightly in July 2016. However, these remain lower year-to-date as compared to year-ago levels,” said a Religare report.

Nomura said India’s August trade data suggest that domestic and global demand remain weak and are weighing on trade volumes, even as the drag from low commodity prices (price effect) is waning. “The sharp narrowing of the trade balance suggests that Q2 2016 will record its first quarterly current account surplus in nine years. We expect the current account deficit to narrow to 0.4 per cent of GDP in 2016 from 1.1 per cent in 2015.

The trade data indicate that weak global demand is weighing on export volumes, import volumes are slowing due to weak domestic investment demand and the drag on both exports and imports from falling commodity prices globally has started to wane, as year-on-year price growth has turned positive. At present, ICRA expects the current account deficit to print at $20-25 billion in FY2017 compared to $22 billion in FY2016.

In addition to weak global growth outlook, uncertainty post-Brexit and in the run up to US Presidential elections, may curtail fresh orders for merchandise and services exports. Meanwhile, the RBI said net payment on account of primary income (dividend, interest and profit) increased marginally in Q1 of 2016-17 from its level a year ago.