Full year CAD may end up at under 2% of GDP
A year ago, when the trade deficit was $58.4 billion or around 12.3% of GDP in the December 2012 quarter, it was difficult to see where it would go. More so since gold imports were climbing like there was no tomorrow—from $9.1 billion in the June 2012 quarter, they rose to $11.1 billion in September and $17.8 billion in December 2012. With the trade deficit down to $33.2 billion in December 2013 or 7% of GDP, according to data released on Wednesday, the recovery is almost unrecognisable. While higher exports growth is one part of the recovery story, the larger part of the story—and that is why the recovery is not fully convincing—is one of import compression. Though, at a time when the current account deficit was expected to keep climbing, restricting it from 6.5% of GDP in December 2012 to 0.9% in December 2013 is an impressive enough result in itself.
Between December 2012 and December 2013, exports rose from $74.3 billion to $79.8 billion while imports collapsed from $132.6 billion to $112.9 billion. In other words, India gained $25.2 billion on the trade account during this period, and nearly 60% of this was due to a reduction in gold imports. It is not clear whether this sharp decline in imports of gold was due to the yellow metal losing its allure—prices fell by 3.6% in the last one year as compared to a 12% appreciation in the year before that. The other possibility is that the sharp import curbs put by finance minister P Chidambaram actually worked. While many, including this newspaper, argued that the import curbs would result in a spurt in smuggling and that the illegal imports would be financed out of lower remittances or NRI deposits, the data does not bear this out. Between December 2012 and December 2013, remittances rose from $8.2 billion to $10 billion. NRI flows, thanks largely to RBI’s scheme of sharing part of the hedging cost of the dollar, rose even more dramatically, from $15.5 billion in December 2012 to $33 billion in December 2013.
Thanks to deals such as the Mylan-Arcolab one, FDI flows also jumped dramatically, from $2.1 billion in December 2012 on a net basis to $6.1 billion in December 2013. This then made up for the shortfall in FII flows. At $2.5 billion for December 2013, net FII flows were significantly lower than the $9.8 billion in December 2012, but much better than the outflows of $6.6 billion in September 2013. If FII flows stabilised in December 2013, and they will look even better in March 2014, it was because, with the CAD under control, and the market excited by the prospects of a BJP government in May, the rupee has been one of the best performing EM currencies over the past few months. As the economy picks up, some part of this will reverse—even if gold imports don’t grow as much, other imports certainly will. Unless moves are made to open up the coal sector and ensure mining in iron ore is once again allowed, India will slip back into a CAD problem as both coal and metal scrap imports will balloon, though its magnitude will be considerably less than it was a year ago.