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Subdued exports and continuing import of crude oil and gold have affected a key indicator of India’s external vulnerability, the current account deficit (CAD).
In the January-March 2012 period, the CAD widened to $21.7 billion (4.5 per cent of GDP) from $6.3 billion (1.3 per cent of GDP) in the year-ago period, according to RBI’s Balance of Payments data.
In FY 2012, the CAD rose to $78.2 billion (4.2 per cent of GDP) from $46 billion (2.7 per cent of GDP) in the year-ago period.
A widening CAD exerts downward pressure on the rupee, making imports costly.
This is a cause for concern for the Government and the RBI as costly crude oil imports have an inflationary impact.
CAD arises when a country’s total imports of goods, services and transfers are greater than exports.
In FY2012, widening CAD and inadequate capital flows led to a drawdown of reserves to the extent of $12.8 billion as against an accretion of $13.1 billion in 2010-11, according to RBI’s BoP data.
According to Ms Aditi Nayar, Senior Economist, ICRA, financing CAD will continue to be a challenge as inflows on account of external commercial borrowings will be governed by global risk aversion and liquidity conditions and FII/ FDI inflows will be dependent on domestic growth and policy reforms.
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