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Falling prices of oil and easing of gold imports are likely to cushion India’s merchandise trade deficit this financial year. In the past two financial years, the deficit stood at unsustainable levels.
According to analysts, the cumulative impact of falling crude prices internationally and a relaxation in the 80:20 gold import scheme will have a substantive impact on the country’s merchandise trade balance, which is expected to end up in deficit in the region of anywhere between $120 billion and $130 billion.
Oil prices have fallen by over 38 per cent from its peak price this year. From an average of $120 per barrel in 2013-14, crude prices are expected to come down sharply to $90 a barrel in 2014-15, owing mostly to the Organization of the Petroleum Exporting Countries (Opec)’s recent decision not to cut output.
“More than gold, it is crude prices that are likely to provide some cushion to the country’s soaring trade deficit. The current account deficit is under control. There will be substantial impact on our oil import, as a result of which the deficit will narrow to a great extent,” said Arun Singh, senior economist, Dun & Bradstreet India.
He, however, added the trade deficit was not expected to come down drastically because factors supporting it, such as falling crude prices and relaxation on gold import norms, happened at a time when half the financial year was over. Besides, a fall in exports will also help prevent a bigger narrowing down of the trade deficit.
Trade deficit for October rose to $13.35 billion from $10.59 billion in October 2013. In September this year, it had widened to $14.25 billion.
The government on Friday removed restrictions on gold imports, scrapping the 80:20 scheme. Large-scale misuse of the scheme had led to smuggling and hoarding of gold.
In October, gold imports soared by a whopping 280 per cent to $4.17 billion.
Under the 80:20 scheme, introduced in August 2013 by the UPA government, traders were mandated to export at least 20 per cent of the imported gold; 80 per cent was for domestic use. However, this led to a surge in gold import rather than curbing it. “The scheme was misused where only a few traders benefited. But most of the imports were happening when the stock market was not doing good. So, people were investing in gold. But now with markets going up, import (of gold) will gradually come down,” said Ajay Sahai, CEO, Federation of Indian Export Organizations (FIEO).
He also noted that plummeting oil prices would firstly have a solitary effect on the exchange rate. Besides, he said, there will be a “drastic” reduction in the oil import bill. He expects the trade deficit for 2014-15 to be $125-$130 billion.
After Opec’s decision not to cut oil output, Brent crude oil touched fresh four-year lows on Friday.
According to Shubhada Rao, chief economist, Yes Bank, the sharp decline in oil prices will have a multifold impact on the economy. Most importantly, she said, the trade deficit is likely to reduce by $14-15 billion compared to last year thereby lowering the pressure on the current account deficit (CAD) by approximately 0.5 per cent of GDP.
