Estimates based on fall in gold imports, rise in exports

The Planning Commission has estimated that the current account deficit for 2013-14 will be around 2.5 per cent of GDP (Gross Domestic Product), sharply lower than Finance Minister P. Chidambaram’s ‘red line’ target of 3.7 per cent of GDP, or $70 billion.

CAD refers to the difference between net foreign currency inflows and outflows. For an economy like India, economists believe that ideally it should be in the range of 2.5-3 per cent of GDP.

“It has been communicated to the Prime Minister that CAD for the full year could be between $40 billion and $45 billion,” Saumitra Chaudhuri, Member of the Planning Commission, told Business Line.

The Commission’s projections are based on a sharp decline in gold imports and better-than-expected growth in exports. In fact, exports have recorded double-digit growth for three successive months ending September 30.

The revised numbers are a stark contrast to the position last fiscal, when CAD widened to a record high of $88.2 billion or 4.8 per cent of GDP. In the first three months of the current fiscal, that is April-June, it was $21.8 billion, or 4.9 per cent of GDP, prompting Chidambaram to set the ‘red line’ target, and unleash emergency measures to curb gold imports, among other steps.

One of the key assumptions of the Planning Commission’s assessment is the sharp decline in trade deficit in the April-June and July-September quarters of the current fiscal. This deficit — the gap between imports and exports — was $50.2 billion in the first quarter, which came down to $29.9 billion in the second quarter, thanks to a sharp fall in gold imports.

“Even if we see some increase in gold imports due to festival demand, it could easily be financed and thus the overall deficit would be not be impacted,” Chaudhuri said. The gold import bill for 2013-14 is expected to be $35-38 billion against $56 billion in 2012-13. This will be possible due to sharp hike in import duty by the Government and restrictions by the RBI. In absolute terms, gold import is likely to come down to between 800-850 tonnes from 950 tonnes in 2012-13.

At the same time, the Commerce Ministry is confident about reaching merchandise exports of $325 billion against $309 billion estimated earlier.

In fact the two sectors, gems and jewellery and engineering exports, which were earlier lagging, are showing positive signs. Similarly, with depreciation of rupee, net invisibles (earning through mainly export of services) are also showing positive signs. The Prime Minister’s Economic Advisory Council estimates net invisibles at $115 billion.

(This article was published on October 16, 2013)
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