India has been facing a large current account deficit due to high oil and gold imports. While the rupee has depreciated by about 14% against other currencies, this has not significantly boosted exports due to weak global demand. To reduce the current account deficit to a more comfortable level of around 2.5% of GDP, the government will need to take steps both to reduce imports and improve exports. Policymakers seem prepared to take stern steps on the imports side, while incentives may be needed to boost exports in sectors like IT, pharmaceuticals, and automobiles.

1. India has been facing strong headwinds when it comes to funding its current
account deficit.
In addition to Oil and Gold, a number of other goods have started pressuring the
already weak current account deficit.
India’s major part of import items, in terms of demand, is inelastic in nature.
Hence, rupee depreciation failed to bring imports to a standstill.
It has always been an endeavor to somehow manage non oil imports imposing
duty or restrictions. In the past couple of months government has taken rising
gold imports seriously and raised the duty from 2% to 8%. Soon RBI made it
mandatory to export 20 per cent of imports in a bid to improve exports and
arrest the rupee’s falls.
Steep rise in import duty, RBI’s measures and some seasonal factors helped
gold demand to subside subsequently June trade deficit remained low. However
anecdotal evidence suggest that households are adding gold on the back
attractive price and hence trade deficit for immediate month is expected be on
the higher side.
Current Account Deficit
-25.0
-20.0
IN Trade Deficit (USD Bln)
the higher side.
Rupee on a year to date basis has depreciated by ~14% which should make
exports competitive however currency depreciation all over the emerging
markets and tepid demand globally has failed to lift the export numbers
substantially.
For now Investors are closely contemplating situation globally and at domestic
levels. High volatility and vulnerable currency has reduced the level of
temptation a foreign investor would have to pour his bucks in the Indian
economy.
CAD which as per latest figure stands at 4.8% of GDP, if at all needs to be
brought to a level of comfort i.e. 2.5% of GDP then probably government not
only will have to act on imports front but will also have to work out plans to
improve exports.
Policy makers in Mumbai and Delhi seem have decided the flow of events. RBI is
done with its duty now the ball is in the court of government which may
announce ‘stern steps’ soon.
-25.0
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13
Oil Imports Non Oil Imports
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2. Among non oil imports coal and gold continues to take major part of
policymaker’s mindshare.
India holds coal reserves which can fulfil their needs for next ~150years.
However, coal imports have been rising from last couple of years given
domestic supplies are not exploited to their fullest. Anecdotal data shows
India’s top coal producer has been missing production targets raising the fear
of higher imports going ahead. Coal mining allotment needs to be expedited
with efficiency.
Overall demand for gold is expected to remain high given the same holds
emotional value. Improved agricultural output may add to demand pressure.
Other items like steel, iron ore rubber and Edible oil are expected to push the
import bill up going ahead.
Government needs to get its acts together to improve exports by announcing
incentives for IT and generic pharmaceuticals companies.
CAD – Probable Solutions/Funding Mechanism
Source : Salva Report
Auto industries which is suffering on the domestic front, if incentivized by
supportive policies, will be able to improve exports.
Enhancing trade finance and announcing supportive polices for SMEs and
MSMEs should be prioritized.
Few countries have high duties on crude edible oil, making refined oil
comparatively cheaper (incentivizing refining business there)for importing
countries. Rising imports of refined oil is seen putting some pressure hence
ministry can look at rising import duty on the same. Duty on luxury goods can
also be revisited.
J curve effect on exports works well when aggregate demand in importing
countries is favorable. Hence recovery in US and Eurozone will be closely
eyed.
NRI bonds and quasi sovereign debt can be contemplated. Interest rates
ceiling on FCNR/NRE/NRO can be revisited.
Source : Salva Report
32
162141
830
1067
970
Jun-13May-13Apr-132012-132011-122010-11
Gold Import (Tonnes)
Source : Businessline
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