The country may end 2013-14 with a current account deficit as low as 2 per cent of GDP thanks mainly to the significant drop in gold imports.
One of the two primary components of the balance of payments, CAD is the sum of the balance of trade (that is, net revenue on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers.
According to a senior government official, encouraging signs on various fronts suggest a significantly reduced CAD — at around $40 billion. This assessment is much lower than the initial estimate of $70 billion or 3.7 per cent of GDP. Last month, Finance Minster P. Chidambaram had placed the CAD at $60 billion and later said he would try and bring it down to $56 billion, a figure at which the RBI had earlier pegged this deficit.
One of the “encouraging signs” is the slump in gold and silver imports, especially post the August clampdown by the Government. Commerce Ministry data show that import of these two precious metals fell to $1.05 billion in November, almost 80 per cent lower than in the same month last year. This has played a key role in bringing the trade deficit down by over 16 per cent to $33.8 billion.
D. K. Joshi, Chief Economist with research agency Crisil, is not surprised at the latest assessment on CAD but feels “it’s been down artificially”. Apart from restrictions on gold imports, the poor economic situation that has affected merchandise imports is also helping lower the deficit.
Joshi feels the key issue now will be the sustainability of the lower deficit especially after the gold import restrictions are eased. His own estimate of CAD is around 3 per cent of GDP.
Aditi Nayar, Senior Economist with ICRA, is equally cautious. She expects the CAD to widen in the third quarter (October-December) and the fourth (January-March) compared to the quarter ended September 2013. Not only was the supply of gold restricted, investment demand was curbed by hiking the Customs duty, she says.
“Moreover, a portion of demand had already been met through higher imports in April-May 2013. However, a favourable kharif harvest is likely to boost rural demand for the precious metals and the import bill may rise in the event of any easing of restrictions on gold import,” she adds.
Nayar also sees the possibility of a rise in non-gold and non-oil imports. “Additionally, merchandise export growth is likely to be muted in the fourth quarter given the base effect.” Overall, she expects a CAD of $50-55 billion in 2013-14. Although experts are sceptical of the Government’s latest expectation on CAD, they believe that if this does happen, the Government may ease up on the restrictions on gold imports. Indeed, the Commerce Department has already begun relaxing some of the curbs on the import of gold dore.