The overall merchandise trade deficit, attributable in good measure to the bigger differential between oil imports and exports, primarily caused the CAD to widen to such unprecedented level.
On its part, the net services export has lost some of its ability to mitigate the impact of the (larger) merchandise trade deficit on the CAD.
Gold imports which stood at 185% of the CAD in Q4 of 2010-11 accounted for just 47% in the CAD in Q2 of 2012-13. In 2011-12, when the government’s worries over the gold imports increased, prompting it to curb imports by increasing customs duty twice, imports of the yellow metal accounted for 74% of the CAD.
Even in terms of absolute value, gold imports have declined to $19.6 billion in first half of this fiscal compared with $29 billion in the year-ago period. So, the curbs on imports of the yellow metal and some diminishing of its lure as a safe haven investment have indeed reduced imports. This means that finance minister P Chidambaram’s statement earlier this week, hinting at further measures to make gold imports “a little more expensive” may be a bit out of place.
Instead, what is required is to spur exports, clamp down on some non-essential imports (especially of finished goods) and arrest the decline in net services exports that had until recently stood the country in good stead in maintaining CAD at comfortable levels.
Even as a proportion of merchandise trade deficit, gold imports were 21.6% during the first half of 2012-13 as against 30.5% in 2011-12 and 26% in 2010-11. As a fraction of trade deficit, oil imports, on the other hand, inched up to 88.5% during H1 this year compared with about 81% in previous two years.
During April-September, service exports grew just 5.4% year-on year, slowing from 7% growth in 2011-12 and 37.5% in 2010-11. Net export of services, in fact, rose only marginally to $15.6 billion in July-September this year from $13.9 billion in the corresponding quarter a year ago.
On Tuesday, Chidambaram said: “Gold imports constituted a substantial chunk of imports and is a huge drain on the current account. Suppose gold imports had been one half of the actual level, that would have meant that our foreign exchange reserves would have increased by $10.5 billion.”
“Gold imports remain a swing factor. While gold imports have come off 23.9% in April-November, we expect a pick-up now with the winter wheat planting progressing smoothly,” says Indranil Sen Gupta, India economist at Bank of America Merrill Lynch. While the RBI is trying to put in place a scheme by which citizens could get a play on global gold prices without physically importing it, the details are still awaited, he said in a report.
“India’s current account deficit swelled to $22.4 billion or 5.4% of GDP in Q2 from $16.6 billion or 3.9% of GDP in Q1FY13 as merchandise exports growth fell more sharply than imports in Q2FY13. A high import bill on account of gold and oil import and falling exports due to global slowdown has lately kept India’s CAD at consistently high levels,” Crisil chief economist DK Joshi said in a report.
After release of the Q2 balance of payment data by the Reserve Bank of India on Monday, prime minister’s economic advisory council chairman C Rangarajan had said the CAD in 2012-13 would be at the same level as last year’s 4.2% of the GDP. The CAD in Q1 of this year was 3.9%. “As a year, capital inflows would be adequate to cover the current account deficit. And therefore, I do not expect the rupee to change much,” Mr Rangarajan had said.
UPA came to power in 2004 on back of inclusive growth and aam aadmi agenda. What they did in first 5 years was crony capitalism. They have spent too much on welfare during that period but economy was growing so things were smooth. In same period, they stopped worrying about growth and ended up killing it. Now they dont have money to fund welfare and growth is gone too. This happened when an economist was our PM.