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Lower CAD and trade deficit data infuse optimism into the economy

Lower CAD and trade deficit data infuse optimism into the economy

Author | Collin Furtado | Thursday, Jun 18,2015 9:19 AM

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Lower CAD and trade deficit data infuse optimism into the economy

The current account deficit (CAD) figures of India recently reduced to 0.2% of the GDP in the January-March quarter according to data released by the Reserve Bank of India (RBI). This is one of the lowest the CAD has touched in a year and reached $1.3 billion of the GDP for the quarter. The CAD is the broadest measure of India’s trade with the world.   
    
This is a huge turnaround from the highest recorded CAD of 4.8% of the GDP in the FY2013 and was one of the worst times for the country as it brought on the worst currency crisis in more than two decades. The CAD in the previous quarter stood at 1.6% of the GDP with a deficit of $8.3 billion and did much better than the CAD in the corresponding quarter (Jan-March) of the previous year which had a deficit of $1.2 billion. This comes as good news for the economy as it means more amount of savings for the country which could be reinvested into growth.

The fall in the global oil prices and robust foreign investment into the country are regarded as reasons behind this. The benchmark Brent crude oil fell by nearly 4% during the previous quarter and reached to one of its lowest since April 2009. It is a key factor since nearly 80% of the oil requirement is imported by India. While foreign investment was up by nearly 36% during the Jan-March quarter in comparison to the corresponding quarter a year ago. It had increased to $12.9 billion on continued optimistic sentiments of the hope for economic reforms by the Narendra Modi government. Also the business sentiments were low during the last quarter of the previous government.

The trade deficit of India also contracted to a three-month low in May. Data released by the Ministry of Commerce & Industry (MCI) showed that the trade deficit has shrunk to $10.41 billion in May from $10.99 billion in April. This is the lowest it has come down since February this year. This was mainly brought about by the reduction in gold imports as global commodity prices slumped. Gold imports reduced by around 23% from April to May to stand at $2.4 billion. The slump in the oil prices was by about 41% in May since a year. The trade deficit is calculated according to the amount of import against the number of exports.

The reduction in the CAD and the trade deficit is welcome news to the economy as shows a reduction in the deficit and could even turn into a surplus economy. The 0.2% CAD of the GDP came as a disappointment to analysts and economists as they expected the last quarter to clock in a current account surplus. The better than expected monsoon expectations also brings in added optimism into the economy. This was reflected in the stock markets as they rallied late on Tuesday, June 16 as the Sensex increased by 0.38% after falling by as much as 0.7% for most of the day and the Nifty increased by 0.42%. The optimism extended to yesterday too as the Sensex gained 0.55% by the end of the day and the Nifty ended the day 0.55% higher.

However, it is not all good news as although the trade deficit was the lowest in three months there was conflicting news with regards to the exports as it fell by 20.2% in May from the corresponding month a year earlier. Some of the key export sectors such as gems and jewellery, engineering, goods leather and petroleum had registered a decline. Non-oil and non-gold imports had reduced for the first time in about a year which also indicated the fragility of domestic economic activity said economists in a media report. Aditi Nayar, a senior economist with ICRA in a media report said that the softening of the trade deficit in May 2015 to a year ago period primarily benefits from the decline in the value of net oil imports and thereby conceals the continuing weakness in export momentum. She further added, “The contraction in export of high value added items such as engineering and electronic goods in May 2015 is a cause for concern.”

Another cause for concern is the continued depreciation in the rupee which has fallen to a two-week low of Rs.64.24 to a dollar. This also impacts exports as it could mean lower earnings of foreign currency on exports. And also impacts imports as import costs increase due to low currency value of the rupee.

In the mean time however the lower CAD and trade deficit has increased the optimism in the key sectors as sectoral indices such as the BSE Consumer Durables index rose to 1.18%, the BSE Auto index increased by 1.08% and the BSE Bankex rose by 0.87%. The higher than expected monsoon outlook will also see other sectors such as FMCG and Retail growing as rural spends will be expected to grow higher.

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