Gold prices falling to a two-year low of $1,384 an ounce are probably too late to turn around FY13’s current account deficit (CAD), but going by trade accounts, Q4FY13 numbers are likely to be much better than Q3’s 6.7% of GDP number—according to data from bullion traders, Q4 imports fell 23% yoy in physical terms. According to Goldman Sachs, thanks to the better US data—despite the expected current slowdown due to the sequester largely—gold prices are going to fall to even lower levels. On February 25, Goldman lowered its 2013 forecast from $1,810 per ounce to $1,600 and that for 2014 from $1,750 to $1,450. A little over a month later, on April 10, it lowered this further—to $1,450 for 2013 and $1,270 for 2014. With gold prices expected to continue to fall, chances are physical imports of gold will fall even further in the coming quarters. Add to this boost the CAD will get from falling gold imports and prices, there is also the fall in prices of other key commodities. Copper is at a one-year low as a result of China’s growth continuing to fall below expectations and crude is at nine-month low—the way things are right now, it looks like it could breach the psychological $100 a barrel mark, though forecasting oil prices is really a mug’s game.
Much of this, of course, is along expected lines and, along with India’s sharp fiscal correction in FY13, is the reason why rating agencies didn’t downgrade India. While India’s CAD will definitely benefit from the fall in gold prices and demand—at $50 billion, FY13’s projected gold imports equal exactly half the likely CAD—this is nowhere near enough. The real issue remains the dramatic fall in manufacturing exports and the stagnation in software exports. Despite the 4% hike in February exports, for instance, April-February exports were down 4% yoy. And this, in turn, was due to a sharp reduction in the share of manufacturing exports—India has just six items in the list of the top 50 global imports. Software exports, once the saviour of the CAD, continue to remain flat and rose just 2.5% in dollar terms between Q2 and Q3—if Infosys’s results last week are any indicator, future growth will remain muted. Coal imports, thanks to environment bans and Coal India’s inefficiency continue to rise from around 0.5% of GDP in the pre-Lehman years to around 1% of GDP today. Repatriation of profits and interest payments on foreign loans are up to around 1.3% of GDP now. If this wasn’t bad enough, this has been accompanied by a collapse in FDI—of the $32.5 billion CAD in FY13’s third quarter, just $2.5 billion was funded through FDI. The current collapse in commodity prices, especially gold, has provided a respite to the worsening CAD, but India needs to do a lot more to be truly out of the woods. FDI flows need to rise to the $50 billion the finance minister has said India can absorb—in FY08, FDI financed more than 100% of India’s CAD; at $50 billion, they will at least finance half the CAD, leaving the country less vulnerable to volatile flows like FII and debt. Indeed, were US recovery to proceed apace and global liquidity reduce, the rupee could once again start looking quite vulnerable. And last but not the least, India needs to get exports back on track, something the foreign trade policy later this week needs to address squarely.