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CAD Drops Sharply to 1.7% of GDP
May 28, 2014

Aided by a sharp fall in gold imports, India’s Current Account Deficit (CAD) narrowed sharply to 1.7 per cent of GDP, or $32.4 billion, in Financial Year (FY) 14 from a record high of $87.8 billion or 4.7 per cent in FY13. The lower CAD is expected to give the new government enough room to revamp the economy.

According to the Reserve Bank of India (RBI), for the fourth quarter of FY14, the CAD narrowed to $1.2 billion, or 0.2 per cent of GDP from $18.1 billion (3.6 per cent of GDP) in the same period of FY13. The decline—also the third straight quarterly fall—was lower than $4.2 billion (0.9 per cent of GDP) in the third quarter of FY14, as the decline in imports was sharper than that in exports,. The decline in imports was primarily led by a steep decline in gold imports, which amounted to $5.3 billion, significantly lower than $15.8 billion in Q4 of 2012-13.

Meanwhile, the revival in domestic consumption or investment is likely to boost growth of non-oil, non-gold imports in the second half of FY15. Even if the 20:80 scheme for gold imports is continued, the expected current account deficit will widen to $40-45 billion in FY15. However, lifting of restrictions on gold imports may widen the current account deficit by an additional $10-15 billion.

Nevertheless, concerns regarding the vulnerability of India’s external sector are likely to be limited in FY15. Notwithstanding the expectation that tapering of the US Federal Reserve’s Quantitative Easing (QE) programme would continue over 2014, portfolio flows into India in FY15 are likely to exceed the level seen in FY14 on account of improved sentiments, a mild recovery in domestic growth and continued interest rate differentials with advanced economies.

On a BoP basis, there was a net accretion of $7.1 billion to India’s foreign exchange reserves in Q4FY14 as compared with $19.1 billion in the preceding quarter. While net inflow on account of portfolio investment was $9.3 billion, net FDI flow was lower at $0.9 billion. Foreign exchange reserves increased by $15.5 billion during FY14 as compared with $3.8 billion in FY13.

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