CURRENT ACCOUNT DEFICIT DOUBLES TO $19.6 b in Q3

CURRENT ACCOUNT DEFICIT DOUBLES TO $19.6 b in Q3

Widening trade deficit and slowdown in capital inflows are weighing down India's key macroeconomic indicators.

The country's current account deficit (CAD) jumped to 4.3 per cent of GDP in the October-December 2011 period (Q3) against 2.3 per cent in the corresponding year-ago period.

Current account deficit occurs when a country's total imports of goods, services and transfers exceed exports, making it a net debtor to the rest of the world.

In absolute terms, the current account deficit has widened to $19.6 billion in the reporting Q3 against $10.1 billion in Q3 of 2010-11.

According to economists, a widening deficit will weaken the rupee which, in turn, will have an inflationary impact (India imports almost 80 per cent of its crude oil requirement).

The rupee has depreciated by about 13 per cent (or Rs 5.75) against the dollar between April 1, 2011 and March 30, 2012.

On Friday, the domestic currency closed at Rs 50.85 to the dollar.

BOP: Experiencing Stress

During Q3, India's balance of payments (the difference between the amount of exports and imports, including all financial exports and imports, by a country) was significantly stressed.

The Reserve Bank of India attributed the stress to widening trade deficit and capital inflows falling short of financing requirement, resulting in significant drawdown of foreign exchange reserves.

In the April-December 2011 period too current account deficit rose to 4 per cent of GDP (3.3 per cent in the April-December 2010 period) to $53.7 billion ($39.6 billion), RBI data on Balance of Payments showed.

The RBI said the rise in current account deficit in the first nine months of the current financial year reflects higher trade deficit on account of imports of petroleum, oil and lubricants, and gold and silver.

The Finance Minister, Mr Pranab Mukherjee, in his Budget speech had said that one of the primary drivers of current account deficit has been the growth of almost 50 per cent in imports of gold and other precious metals.

Dr Brinda Jagirdar, General Manager (Economic Research), State Bank of India, said: "Nothing much can be done to reverse the slowing exports as globally demand is falling. So, current account deficit can be tackled by making gold imports unattractive and by attracting foreign capital via external commercial borrowings and non-resident deposits."

Source: Business Line