All the promises of containing country’s current account deficit (CAD) made by the Finance Minister seem to have fallen flat on the ground.
CAD for the first quarter of FY 14 stood at 4.9 per cent of the gross domestic product (GDP) to $ 21.8 billion mainly due to the heavy import bills. As compared to previous financial year, CAD rose to 4.9 per cent from 4.4 per cent. As per the statement issued by the Reserve Bank of India (RBI), CAD rose due to the high import of gold and oil.
In its Balance of Payment (BoP) statement, RBI said, “The trade deficit, coupled with a slow recovery in net invisibles (income and services), led to widening of CAD to $ 21.8 billion in Q1 of 2013-14 from $16.9 billion in Q1 of 2012-13.”
During Q1, gold imports increased by $ 7.3 billion to 335 tonnes. Citing it the main cause in the sharp rise in deficit numbers, RBI said, “Excluding the increase in gold imports of $ 7.3 billion in Q1 of 2013-14 over the corresponding quarter of the preceding year, CAD would work out to $ 14.5 billion, which translates into 3.2 per cent of GDP.”
To make the situation a little tighter, RBI also informed that there was a small fall on country’s foreign exchange reserves to finance the CAD. “On BoP basis, there was a slight draw down in foreign exchange reserves of $ 0.3 billion in Q1 of 2013-14 as against an accretion of $ 0.5 billion in Q1 of 2012-13,” RBI added.
RBI in its statement further added that the BoP was complete disrupted as the country’s exports declined by 1.5 per cent while imports rose sharply by 4.7 per cent. The trade deficit grew to $ 50.5 billion in Q1 of 2013-14 as compared to $ 43.8 billion in the last fiscal.
On sequential basis, CAD rose from 3.6 per cent in January-March quarter. Going forward, the Government had announced that all was being done to reduce the deficit to 3.7 per cent or $ 70 billion for FY 14 from a record high of 4.8 per cent or $ 88.2 billion in FY 13.
The RBI data showed capital account, which includes FDI,portfolio investment and overseas borrowing by companies, had a surplus of $20.8 billion in the June quarter. This was higher than $17.8 billion surplus in the March quarter.
Net foreign direct investment (FDI) surged to $6.5 billion in Q1 of 2013-14, from $3.8 billion in Q1 of 2012-13. Net portfolio investment registered a marginal outflow of $0.2 billion as compared to outflow of $2.0 billion in Q1 of 2012-13, primarily led by the debt component of FII investment.
“Outflow of portfolio investment occurred essentially from the third week of May 2013 after the US Fed indicated the possible tapering of quantitative easing,” RBI said.
Although the capital inflow was in surplus, higher trade deficit led to a draw down in the forex reserves. India’s forex reserves currently stands at over $270 billion.
Petrol, oil, lubricant import rose to $42 billion in Q1 of current fiscal, from $39.4 billion in the same period last year.
The initiatives taken by the government and the RBI to contain import of gold and encourage flow of foreign funds into the country is likely to ease pressure on CAD in the coming quarters.High CAD has put pressure on Indian currency, which touched a low of 68.86 to a dollar on August 28. It closed at Rs 62.60 today.
Meanwhile, the data on India’s international investment position showed that net claims of non-residents on India decreased by $12.5 billion over the previous quarter to $296.9 billion as at end-June 2013.
The foreign-owned assets in India decreased by $25.7 billion over the previous quarter to $731.5 billion as of June end this year.