The slump in gold prices in mid-April sparked hopes that the country would be able to narrow its current account deficit (CAD) as less would be spent on buying gold. But a surge in imports driven by massive gold purchases widened the trade deficit sharply, overshadowing the further improvement in exports performance.
“Government is serious about growing trade deficit and would take corrective measures once we have evidence that import of gold in the month of april is outlier or consistent,” a senior official in the Commerce Ministry told The Pioneer.
“We will have to wait and watch it for couple of months” he added. “Gold is one of the contributors but there are invisibles like FII, which have also contributed to high CAD,” he replied when asked what is the major factor behind high CAD).
“Going forward in 2013-14, we don’t expect (CAD) to cross 4.6 per cent of the GDP”, he said.
Infatuation with gold has been one of the main contributors to India’s current account deficit, which widened to a record 6.7 per cent of gross domestic product in the October-December quarter, the latest period for which GDP data are available.
In a note, ratings agency Crisil said that the seasonally-adjusted trade deficit was only slightly higher in April than March, and was lower than monthly trade deficit recorded between October 2012 and February 2013. -2). And DK Joshi, chief economist at Crisil research is more optimistic on the CAD front when he says: “We are at roughly 4.5 per cent of GDP in FY 14 and 90 billion in value terms.”
“We see the recent rise in gold imports as a bunched-up rise in pent-up consumption demand, which should fade over the coming quarters,” brokerage house Nomura’s chief economist Sonal Varma said in a note.
She said the weak domestic demand and fall in the prices of gold and oil will help narrow the current account deficit to 4.3 per cent in FY14.
“Higher gold imports, in our opinion, are partly driven by festive demand on the back of Akhshaya Trithya. We expect gold demand to moderate in coming months on the back of lower prices and frontloaded demand,” a note from another brokerage Barclays said. It expects the CAD to narrow down to four per cent.
Trade numbers released on last Monday for April said exports grew for the fourth consecutive month recording a growth of 1.6 per cent but a more than doubling of gold imports worth $ 7.5 billion from $3.5 billion pushed up the trade deficit to $17.7 billion.
“The widening deficit in April should not be seen as the start of an alarming trend, as the March deficit is typically smaller given seasonal patterns,” the Barclays report added.
India has raised the import tax on gold to 6 per cent from 2per cent over the last year-and-a-half in the hope of reducing gold purchases. But that hasn’t stopped the buying.
The Reserve Bank of India has recently announced a policy measure that would effectively make it tougher to import gold, saying only jewelry exporters would be allowed to use a credit facility for importing gold consignments.
The importer places an order with one of the designated banks allowed to import gold and pays for the gold only on delivery. The RBI said it will announce more measures to restrict gold imports at the end of this month.