|Wednesday, 02 October 2013 00:00|
Foreign investors aren't convinced about India yet, but the good news is the CAD is more manageable
Though the hike in the CAD from 3.6 per cent of the GDP in the last quarter of 2012-13 to 4.9 per cent in the first quarter of the current fiscal year sounds ominous, the data released by the RBI on Monday is largely irrelevant. While the first quarter merchandise trade deficit was $50.5 billion and the CAD $21.8bn, exports have picked up significantly since. The average trade deficit rose from $14bn per month in Q1 of 2012-13 to $19bn per month in Q3, before falling to $17bn in Q1 this year. In July and August, however, this trade deficit has narrowed sharply to a monthly average of $11.5bn. When the RBI puts out the CAD data for the quarter ending September 2013, chances are the CAD could be down to anywhere between $5-6bn. That's a dramatic fall and also means we could end 2013-14 with a CAD of around $55-60bn, well below the $70bn estimate put out by the finance ministry a couple of months ago, a number most scoffed at then.
Combine this with the fact that FIIs have begun to return in September, and the economic news begins to look less bleak than it did a few weeks ago. According to Q1 FDI data, FDI interest seems to have sustained: compared to $5.7bn in the March quarter, the June quarter saw inflows of $6.5bn. There are other significant slippages, in the amount of money raised through ECBs as well as in short-term trade credit. But that is to be expected — all recoveries take time. Though the CAD is likely to be much lower than previously anticipated, financing this through FII and FDI means Indian policy cannot afford to slip once again. It's early days yet, but the core sector data, out Tuesday, is encouraging, especially that for cement sales. But oil and natural gas continue to post negative growth. Yet it could be easy to reverse this — firms like ONGC, Cairn and RIL are all waiting for government approvals to ramp up production.
With the US taper now put off by at least six months, the rupee is likely to be more stable, as will inflows. The flip side is that the US shutdown will slow growth and so worsen the CAD in the months ahead. What you gain on the swings, you lose on the roundabouts. The larger point, however, is that much of the deterioration in the CAD, and its improvement, lies in India's control. Stepping up production of coal, oil, gas and iron ore, the most obvious import-substituting items, will be key.