Friday, March 29, 2013

As CAD widens, govt hints at more steps to bridge gap

NEW DELHI, March 29, 2013

Even as the country's current account deficit (CAD) widened to a record high of 6.7 per cent of the GDP (gross domestic product) in the October-December quarter this fiscal, the government appeared undaunted and asserted that it would put in place more measures to bridge the 'large' gap.

"The number (6.7 per cent) is large though not surprising... Both the RBI and the government will continue to monitor CAD and will take additional steps whenever warranted," the Finance Ministry said in a statement.

As per the data released by the Reserve Bank of India (RBI) earlier during the day, CAD, which in effect is the difference between inflow and outflow of foreign capital, "widened from 5.4 per cent in the second quarter (July-September) to a record high of 6.7 per cent of GDP in the third quarter, driven mainly by large trade deficit."

In monetary terms, CAD widened in the October-December quarter to $32 billion, markedly up from $20 billion (4.4 per cent of GDP) in the same quarter of 2011-12, mainly on account of a significant increase in oil and gold imports at a time when exports have remained particularly subdued in the wake of an uncertain global environment and recessionary conditions prevailing in the U.S. and Europe.

During April-December of 2012, CAD stood at $71.7 billion, which worked out to 5.4 per cent of the GDP as compared to $56.5 billion, or 4.1 per cent of the GDP in the like period of 2011. Significantly, gold imports during the April-December period stood at $ 38 billion while in fiscal 2011-12, imports of the commodity was valued at $ 56 billion.

Clearly, while gold imports appeared to be on a decline, it was the trade deficit during the third quarter that widened to $ 59.6 billion, up from $ 48.6 billion in the same quarter a year ago, mainly driven by higher imports which were up by 9.4 per cent during the period.

CAD, the Finance Ministry said, was being financed through capital inflows without dipping into foreign exchange reserves and hoped that gap would narrow down in the coming months on account of a likely improvement in exports.

"It is a matter of satisfaction that it has been financed without drawing upon the foreign exchange reserve. Going forward, we hope to be able to finance CAD through sufficient foreign inflows…CAD for fourth quarter is expected to be smaller.

The government is committed to bringing down CAD over the time, as well as ensuring that it is financed safely," it said.

Over the last few months, the government has been taking steps by way of imposing curbs on import of gold by hiking the duty in its effort to contain the ballooning CAD. Alongside, it has also taken steps to improve availability of gold.
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