With a pick up in merchandise exports and a dip in imports, the country’s current account deficit narrowed sharply to a more manageable 1.2 per cent of GDP in the second quarter bringing Christmas cheer for the embattled United Progressive Alliance (UPA) Government.
CAD — the excess of all goods, services and transfers imported in a period over the total exports — fell to $5.2 billion in the July-September quarter from $21 billion in the year-ago period. This was also lower than the CAD of 4.9 per cent of GDP in the previous quarter, ended June 30, 2013.
The RBI also packed one more surprise: The announcement came in a full month ahead of schedule, perhaps to assuage the market as it ended the lucrative dollar swap window.
Both the Government and the RBI feel that a CAD of 2.5 per cent of GDP is manageable in the current economic context. For the first half of the current fiscal, the CAD has averaged a little over 3 per cent of GDP.
In November, Finance Minister P. Chidambaram had revised the CAD target to $60 billion for the full year. For the first six months of the fiscal, CAD totalled about $27 billion, helped by a sharp fall in gold imports and a rise in the exports of textiles, leather and chemicals.
However, the Government did not receive adequate capital flows to fund the CAD. The country’s foreign exchange reserves fell $10.4 billion as they were used to fund the deficit.
The exclusive dollar swap window announced by RBI Governor Raghuram Rajan in September had found favour with foreign investors as they brought in $34 billion in just two-and-a-half months. The window was shut, as scheduled, on November 30.
The latest CAD figure and the GDP recording a growth of 4.8 per cent in the second quarter are likely to strengthen the rupee. However, a high fiscal deficit that has already touched 84 per cent of the projected Rs 5.42-lakh crore is likely to play spoilsport with some investors.
While the Government seems to have virtually won the battle on the CAD front, it faces an uphill task on the inflation and the fiscal deficit flanks given that elections are less than six months away.