Millennium Post

SOS! Current account deficit rises to 4.8% of GDP in FY13

Current account deficit (CAD) touched a record high of 4.8 per cent of gross domestic product (GDP) in 2012-13 on rising gold and oil imports, though still better than market expectation, bringing relief to the government which is struggling to arrest the sliding rupee.
The current account deficit, which is the difference between the outflow and inflow of foreign currency, however, moderated 'sharply' to 3.6 per cent of gross domestic product in the last quarter of 2012-13 fiscal after it touched a historic high of 6.7 per cent in the October-December quarter. It was 4.4 per cent in the March quarter of financial year 2011-12.

The current account deficit was at $78.2 billion (4.2 per cent) in 2011-12 fiscal, but higher oil and gold imports pushed it up to $87.8 billion (4.8 per cent) last fiscal, showed data compiled by the Reserve Bank of India (RBI), the country’s central bank.

The Reserve Bank of India's comfort level for the current account deficit  is 2.5 per cent of gross domestic product. The Finance Ministry, meanwhile, said 'the short-term increase or decrease in the current account deficit should not be a cause for either optimism or pessimism'.
'We must look at the figure at the end of the year where the current account deficit   stands,' it said. The Rupee had touched a record low of 60.76 to a dollar yesterday. After the the current account deficit  data, the domestic currency recovered to 60.23 to the dollar.

'Markets have been over reacting as we have seen in the case of prediction for CAD last year which were much higher than 5 per cent and we have seen that it is much lower than 5 per cent,' the Ministry said.

The Reserve Bank of India said that petroleum and gold constituted about 45 per cent of total merchandise imports during 2012-13. While petroleum import rose by 9.3 per cent, gold import declined by 4.8 per cent during the fiscal.

For the full fiscal, gold import stood at $53.8 billion, down from $ 56.5 billion.  Import of petroleum in 2012-13 fiscal rose from $155 billion to $169.4 billion. According to the data, trade deficit in 2012-13 remained at an elevated level of $195.7 billion on account of a decline in merchandise exports by 1.1 per cent and rise in imports by 0.5 per cent on a year-on-year basis.Decline in exports was due to fall in outbound shipment of manufactured items like engineering goods, textiles, gems and jewellery and also primary products like iron ore and minerals.

The Reserve Bank of India said that the the current account deficit  widened in 2012-13 on account of 'burgeoning trade deficit, decline in net invisible earnings due to sharp increase in investment income payments and only a modest rise in net services receipts'.
It said that while foreign direct investment (FDI) inflows moderated during 2012-13, there was a surge in portfolio investment during the period. Net foreign direct investment moderated to $19.8 billion in 2012-13 from $22.1 billion in 2011-12. Net portfolio investment, however, rose to $ 26.7 billion in 2012-13 from $16.6 billion a year ago.

'While rise in portfolio investment was essentially due to increase in equity investment, debt investment by foreign institutional investors has been lower as compared to the previous year,' the Reserve Bank of India said. During 2012-13 there was an accretion of $3.8 billion in India's foreign exchange reserves as compared to a draw-down of reserves worth $12.8 billion in 2011-12, it said.

Crisil Chief Economist D K Joshi said, ‘The current account deficit number is a positive surprise. But it may, however, go up again the next quarter that is April-June, because of higher gold imports'.

He further said for full 2013-14 fiscal, the current account deficit  is expected to be at 4.5 per cent.
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