India’s current account deficit (CAD) narrowed sharply to a four-year low as gold imports cooled and imports declined in a slowing economy.
CAD was at $4.2 billion, which is 0.9 per cent of GDP, in the third quarter of FY14, significantly lower from $31.9 billion (6.5 per cent of GDP) in the corresponding period of FY13 and $5.2 billion (1.2 per cent of GDP) in the second quarter of FY14, the Reserve Bank of India said on Wednesday.
“The lower CAD was primarily on account of a decline in the trade deficit as merchandise exports picked up and imports moderated, particularly gold imports,” the RBI said. The contraction in the trade deficit, coupled with a rise in net invisibles receipts, resulted in a reduction of the CAD , which reflects difference between inflow and outflow of foreign currency, to $31.1 billion (2.3 per cent of GDP) in April-December 2013 from $69.8 billion (5.2 per cent of GDP) in April-December of 2012.
However, economists warned the CAD gap may widen again if the economy improves. “Even if gold imports restrictions continue, the CAD may be as high as $45 billion in FY15. Any revival in domestic consumption or investment impulses would boost growth of non-oil, non-gold imports in FY15, which have undergone a contraction in the current year. Moreover, the coal import volume is set to rise, exerting pressure on the trade deficit,” said Aditi Nayar, senior economist, ICRA.
According to economists, CAD has come down for all the wrong reasons. If the economy picks up, imports will rise and the current account deficit will go up again.
The government increased duty on gold imports three times last year to help pare a trade imbalance that has weighed badly on the rupee. The currency has since then gained about 11 per cent since reaching an all-time low on August 28, the world’s best performer in that time, as imports have fallen and growth remains subdued.
The decline in imports was led by a steep decline in gold imports, which amounted to $3.1 billion compared to $17.8 billion in Q3 of FY13.