India’s current account deficit (CAD) narrowed sharply to USD 4.2 billion (0.9 percent of GDP) in Q3 of 2013-14 from USD 31.9 billion (6.5 percent of GDP) in Q3 of 2012-13 primarily on account of a decline in the trade deficit as merchandise exports picked up and imports moderated, particularly gold imports. This is also lower than USD 5.2 billion (1.2 percent of GDP) in Q2 of 2013-14.
On a BoP basis, merchandise exports increased by 7.5 percent to USD 79.8 billion in Q3 of 2013-14 (3.9 percent in Q3 of 2012-13) on the back of significant growth especially in the exports of engineering goods, readymade garments, iron ore, marine products and chemicals.
On the other hand, merchandise imports at USD 112.9 billion, recorded a decline of 14.8 per cent in Q3 of 2013-14 as against an increase of 10.4 percent in Q3 of 2012-13. Decline in imports in Q3 was primarily led by a steep decline in gold imports, which amounted to USD 3.1 billion as compared to USD 17.8 billion in Q3 of 2012-13 and USD 3.9 billion in Q2 of 2013-14. As a result, the merchandise trade deficit (BoP basis) contracted by around 43 per cent to USD 33.2 billion in Q3 of 2013-14 from USD 58.4 billion a year ago.
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Net services receipts improved during Q3 of 2013-14, essentially reflecting a decline in payments on account of services imports. Net services at USD 18.1 billion recorded a growth of 8.9 per cent in Q3 of 2013-14 (y-o-y). Net outflow on account of primary income (profit, dividend and interest) amounting to USD 5.4 billion in Q3 of 2013-14 was relatively lower than that in the corresponding quarter (USD 5.8 billion) of 2012-13 as well as the preceding quarter (USD 6.3 billion). In Q3 of 2013-14, gross private transfer receipts at USD17.3 billion showed an increase of 4.8 percent (y-o-y).
How experts read it
Q3 CAD is slightly better than even our lower band of estimation, Aditi Nayar of ICRAtold CNBC-TV18 in an interview. For the full year, she sees CAD at USD 35-40 billion. Moderation in merchandise trade export growth and mild growth in services exports is likely to continue in Q4 as well, she added.
“Particularly, for merchandise exports the base effect is rather high in Q4 particularly in March. So, I think a little bit of caution is still warranted,” she said. Also, remittances in Q4 could be on the lower side because of unofficial gold imports coming in through back channel, she said.
Agreeing with Nayar, Soumya Kanti Ghosh of SBI said that Q3 CAD has beaten estimates and for the full year, CAD can further narrow to USD 35-40 billion with larger probability of it being close to USD 35 billion.
Meanwhile, sharing views on the impact of lowering CAD on the rupee, Shubhada Rao of Yes Bank said despite stress in the global currency markets, rupee has been better performing currency essentially because of CAD concerns ebbing and sustained improvement in capital flows. “Funding risks have ebbed. Shrinkage in current account is what is giving the fundamental supports to the rupee to trade in narrow range,” she added.
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