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The finance ministry expects remittances by non-resident Indians to increase by up to 20% in the current financial year which would help narrow down the current account deficit (CAD) to 4.1-4.4% of GDP against the record 4.8% in the previous year.
The Rupee depreciation against the dollar may have sparked much hue and cry, but the ministry assesses that fall in the value of rupee will have both positive and negative effects on CAD, almost nullifying each other.
Remittances are expected to increase by 10-20% in the current financial year, compared to 2012-13, the ministry expected. The Finance Ministry's expectation was given in a presentation made by the Planning Commission to its chairman--Prime Minister Manmohan Singh-- recently, those in know of the development told Business Standard.
According to Balance of Payments (BoP) data, remittances stood at $62 billion in 2012-13 providing much relief on the CAD front to the government. Otherwise, trade deficit, had touched $ 190 billion. Remittances helped control CAD at $88 billion in 2012-13, which was still at the record high of 4.8% of GDP. Ten% rise in remittances mean $68.2 billion and 20% increase means $74.4 billion in 2013-14.
While remittances form part of the current account balance, NRI deposits are a component of capital flows. Besides, there is no obligation of repayment in remittances and hence are preferred over NRI deposits by a section of analysts.
The finance ministry expected that overall CAD may come down to 4.1-4.4% of GDP in the current financial year from 4.8% in the previous year, subject to reduction in gold imports and maintaining of the GDP growth as per Budget assumption.
Gold imports fell from $56.5 billion in 2011-12 but remained elevated at $53.8 billion in 2012-13.
The government had announced a hike in customs duty on gold from 6% to eight% in June to curb gold imports. In a matter of six months in this calendar year, the government had doubled the customs duty from four% to eight%. The measures did have an impact on reducing gold imports in recent times. For instance, gold and sliver imports fell to $2.45 billion in June from $8.4 billion in May of the current financial year. However, in the first quarter of the current financial year, the imports of the two precious metals rose to $18.3 billion dollars from $8.8 billion dollars in the corresponding period of last fiscal.
GDP growth declined to a decade low of 5% in 2012-13 and the budget has assumed it to grow by 6.4% in the current financial year. However, for measuring CAD as percentage of GDP, nominal part of India's economy is taken into account. GDP in nominal terms is assumed to grow by 13.4% during 2013-14 in the Budget. With inflation coming down in recent months, and GDP not expected to cross six% in the current financial year, CAD as percentage of GDP will magnify on any given absolute number.
The ministry expected that the effect of rupee depreciation by 20-25% is going to be widen CAD by 0.4% of GDP due to valuation changes.
The impact of valuation changes was quite visible on CAD during the first quarter of 2012-13. CAD stood at $16.4 billion in Q1 of 2012-13, lower than $17.4 billion in the corresponding quarter of the previous year. However, as a proportion of GDP it rose to 3.9% in April-June of 2012-13 against 3.8% in the corresponding period of the previous year. One of the major factors for this was rupee depreciation of about 17% against US dollar over the period.
At the same time, 20-25% depreciation in the rupee value against the dollar would lead to small tightening of imports and similar rise in exports leading to 0.4% shrinkage of trade deficit, offsetting valuation impact, the ministry believed.
The rupee has already depreciated 12.12% to stand at 60.86% on August 8 this fiscal year against 54.28 on the last working day of 2012-13.
However, the ministry's expectation has not translated to actual trade in the first quarter of 2013-14. Trade deficit in the first quarter of 2013-14 already rose to $50.2 billion from $42.2 billion dollar in the corresponding period of 2012-13. As such, trade deficit grew 18% in the first quarter. The rupee had depreciated 9.41% to stand at 59.39 against the dollar as on end June.
