Healthy signs

The remarkable improvement in the country’s current account deficit  (CAD) statistics should not cause any complacency.

The figures released by the RBI for the second quarter of the year show a phenomenal fall in the CAD from $ 21 billion during the first quarter to $ 5.2 billion. This represents a decline from 4.9 per cent of the GDP to about 1.2 per cent. The figures look still better when compared to the corresponding period of last year. The improvement in the situation is because of a sharp decline in trade deficit. Exports registered a significant rise on the back of a depreciated rupee. Combined with a fall in imports, this contributed to a much better balance of payments position. Some measures taken by the RBI certainly helped take the country out of the precarious and scary situation which existed just three months ago.

The finance minister has seen the improvement as a sign of a turnaround of the economy. But this is a judgment too early to be made. A beneficial external environment was a factor but this can change. Exchange reserves are still low. The RBI’s opening  of a separate window for oil companies helped a lot. Imports have started showing an upward trend and this will have an impact on the trade deficit going forward. The hot money which had gone out of the country at the hint of the US Fed’s tapering plan and which started coming back on its postponement can still flow out.

One positive point is that  the country may be better prepared to face that situation when it happens in  a few weeks or months. There is the need for policies and actions which encourage long-term flow of capital into the country.

Strangely, one major area of concern is the precipitous fall in gold imports. The 25 per cent drop in gold imports during the quarter was a major factor in the shrinking of the CAD figures. The strong measures taken by the RBI and the government helped to curtail gold imports. But gold demand is still active and there is evidence that smuggling has increased substantially.

It is estimated that at least 100 tonnes of gold came into the country through illicit channels in recent weeks. All neighbouring countries have seen a big spurt in gold imports and this is said to be moving into the country. Illegal inflow of gold is more harmful than high legal imports.

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