 "P Chidambaram")
The country’s current account deficit (CAD) for the fourth quarter of 2012-13 narrowed sharply to 3.6 per cent of gross domestic product (GDP), helping a battered rupee gain some ground against the dollar and pushing the sentiment in equity markets. The numbers came as a surprise, also because these were released a day ahead of schedule and a day after the rupee touched a record low of 60.76 a dollar. The data helped lift the rupee to as high as 60.19 a dollar on Thursday.
But the good news seems to have ended there. If lower CAD came as comfort to policymakers, rising external debt was a source of major concern. As of the end of March, external debt rose 12.9 per cent to $390 billion, compared with the year-ago period. The increase was primarily on account of short-term trade credit, external commercial borrowings (ECBs) and non-resident Indian deposits.
Also, for the full financial year, though lower than the expected five per cent of GDP, CAD hit a record high 4.8 per cent, mainly because of rising imports of oil and gold. (INDIA’S CURRENT ACCOUNT BALANCE)
For the March quarter, CAD narrowed to $18.1 billion, or 3.6 per cent of GDP, from an all-time high of $32.6 billion, or 6.7 per cent of GDP, the previous quarter.
“We expect the commodity import bill to moderate in the near term, reflecting a relatively benign commodity price outlook, subdued domestic growth and a likely softer rate of inflation. Our baseline scenario is for CAD to fall to 3.9 per cent of GDP in 2013-14,” said Barclays’ Siddhartha Sanyal.
Rating agency CRISIL Research was not so hopeful. “The dip in CAD in the fourth quarter is temporary. It will rise to settle at 4.5 per cent of GDP for FY14. Financing CAD is a bigger challenge this year. For one, global liquidity will be stretched if the US recovery continues and as Federal Reserve starts winding up its bond-purchase programme by the end of 2013. Also, with much weaker growth prospects vis-à-vis other emerging markets, India’s attractiveness as an investment destination is waning,” it said.
Industry body Ficci said though discernible moderation had been noted in the Q4 numbers, such a high level of deficit was unsustainable and the recent plunge in the value of the rupee, in all possibility, would further aggravate the issue of ballooning imports.
Also, given the extent of the rupee’s fall since the beginning of this financial year, Ficci believes relying on FIIs for helping curtail the deficit is certainly not a good strategy for the long run.
Merchandise exports increased 5.9 per cent in Q4 of 2012-13, compared with 2.6 per cent in the same quarter the previous year. Merchandise imports recorded a marginal decline of one per cent in the quarter, against an increase of 22.6 per cent in the same period of 2011-12. The non-oil non-gold component of imports showed a decline, reflecting a slowdown in domestic economic activity. As a result, trade deficit narrowed to $ 45.6 billion in Q4 of 2012-13 from $ 51.6 billion in the same quarter of 2011-12.
During 2012-13, CAD stood at $87.8 billion (4.8 per cent of GDP), against $78.2 billion (4.2 per cent of GDP) during the previous financial year. A burgeoning trade deficit, along with a significant decline in invisible earnings, caused widening of CAD during the year.
The lower-than-expected CAD numbers also helped the markets gain, with the Sensex rising nearly two per cent. The gain was also because companies like Reliance Industries gained on expectations the government might increase domestic gas prices.
In its financial stability report published on Thursday, RBI voiced concern over an increase in external debt. According to it, the increase in total external debt during 2012-13 was primarily on account of a rise in short-term trade credit. RBI observed there had been a sizeable rise in external commercial borrowings (ECBs) and rupee-denominated non-resident Indian deposits.
For the financial year ended March, the country had a balance of payments surplus of $3.83 billion, compared with a deficit of $12.8 billion a year earlier. The swing to surplus was due to robust capital inflows. Experts said the country was in a far better shape than during a balance of payments crisis of 1991.
