In what comes as good tidings for the newly sworn in Narendra Modi Government, India’s current account deficit fell sharply to $1.2 billion, or to a mere 0.2 per cent of Gross Domestic Product (GDP), in the fourth quarter of 2013-14. CAD was pegged at $18.1 billion, or at 3.6 per cent of GDP, in the same quarter of the pervious fiscal.
Key indicator Current account deficit (CAD), a key indicator of a country’s external vulnerability, occurs when a country’s total imports of goods, services and transfers are greater than exports.
A widening CAD usually exerts downward pressure on the domestic currency, making imports costlier. This is a cause for concern for the Government as costly crude oil imports have inflationary impact. “The lower CAD was primarily on account of a decline in the trade deficit as decline in imports was sharper than that in exports,” the RBI said in a statement.
The previous Government had taken a number of steps to control the galloping CAD.
One of the key measures was to put several impediments on the import of gold. This had the desired effect as CAD more than halved to $32.3 billion for the financial year ended March 31, 2014.
On the trade deficit front, the RBI said the recovery in exports and the import moderation led to a sharp recovery in the gap to $147.6 billion in FY14 as against the $195.7 billion in FY13.The net inflows declined to $48.8 billion during the just-concluded fiscal, against $89 billion in the previous fiscal, the RBI said, attributing this to lower foreign direct investment flows, net repayment of loans and trade credit and advances.
Meanwhile, the balance of payment (BoP) sharply jumped to $7.05 billion in the fourth quarter of 2013-14 from $2.68 billion in the same period in 2012-13, RBI data showed.
However, on a quarter-on-quarter basis, it massively shrunk from $19.103 billion in the December quarter due to a massive easing in the capital account in the period, the RBI data said.
For the full year, the BoP stood at $15.459 billion up from $3.83 billion in FY13.
Rating agencies A higher CAD for much of 2012 had led several ratings agencies to warn India of a sovereign ratings downgrade.
It remains to be seen if the new Government is able to contain the CAD at the current lower levels as it lifts the control on gold imports slowly and that too at a time when the economy is still not out of woods, say experts.