Current account deficit zooms

Last Updated: Fri, Mar 29, 2013 05:49 hrs

The country's current account deficit (CAD) rose to a record high of 6.7 per cent of gross domestic product (GDP) in the December quarter on account of heavy oil and gold imports, besides muted exports. Though the deficit was worse than expected and way above the Reserve Bank of India's (RBI's) comfort zone of 2.5 per cent, the government put up a brave face, saying it would do all that was needed to tackle the problem.

CAD had been 5.4 per cent of GDP in the previous quarter and 4.4 per cent in the third quarter of last year.

The finance ministry said the deficit was likely to moderate in the March quarter if the current trend of improved exports and steady imports persisted. The government and the central bank would take additional steps, whenever warranted, to tackle the gap, the ministry said.

While robust inbound investments into equities and debt have enabled India to fund the gap, these flows can be fickle and a sharp reversal, possibly triggered by an external shock, would leave the balance of payments (BoP) at risk.

But the latest numbers show BoP has moved into the positive territory, with accretion of a marginal $800 million to the foreign exchange reserves in the December quarter. There had been a drawdown of $220 million in the previous quarter. However, the positive BoP is seen by some as fragile. Samiran Chakraborty, head of regional research (South Asia), Standard Chartered Bank, said he was not comfortable with the improvement through other capital, comprising loans and trade credit. It had to be through foreign direct investments and foreign institutional investments, he said.

In absolute terms, CAD stood at $32.6 billion, against $20.2 billion in the same quarter last year, RBI said in a statement. In the second quarter this financial year, it was at $22.6 billion.

For the nine months ended December, CAD stood at 5.4 per cent of GDP, up from 4.1 per cent in the comparable period the previous year. There was accretion of $1.1 billion to the reserves (on a BoP basis) during the period, compared with a drawdown of $7.1 billion in April-December 2011.

The trade deficit widened to $59.6 billion in the third quarter, compared with $48.6 billion in the same quarter of 2011-12. The economic growth also slowed in the quarter to 4.5 per cent.

Merchandise exports did not show any significant growth in the quarter, while it had grown 7.6 per cent in Q3 of 2011-12. The imports during this year's third quarter, on the other hand, grew 9.4 per cent, spurred largely by oil and gold demand.

The net services receipt recorded a rise of 9.2 per cent, mainly on account of travel, transport, software services and financial services. The net invisibles moderated.

Referring to financing of the deficit, RBI said, with a surge in capital flows, it could be fully financed. Foreign portfolio investments rose to $8.6 billion from $1.8 billion in the third quarter of the previous year.

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