"A surprise improvement in India's balance of payments in the fourth quarter of the fiscal year that ended in March, with a rise in exports and decline in imports, was not enough to prevent the full-year current account deficit rising to a historic high compared with gross domestic product (GDP).
The full-year current account deficit (CAD) to GDP ratio hit 4.8%, up from 4.2% in the year to March 2012, even after a near 6% rise in exports in the fourth quarter from a year earlier and a 1% fall in imports. That brought the Q4 CAD deficit to 3.6% of GDP, down from 6.7% in the previous quarter.
The government singled out gold imports as the most important reason for the ballooning CAD, and there is a grain of truth in the assertion. Gold imports have risen since 2010-11. Yet this phenomenon can be attributed mostly to high inflation in India, resulting in the real rate of interest in India being negligible and even negative. It is therefore natural for domestic savers to turn to gold for succor.
Having said that, gold imports in the 12 months to March this year actually declined 4.75% from the previous year, falling in all but the third quarter on an annualized basis. For the full year, India's non-gold imports remained stagnant.
What is significant is the increase in oil imports, which rose 10.11% during this period, even as India recorded its lowest GDP growth in a decade ...
The rising volumes of oil and coal imports are two major reasons why India's CAD deteriorated to worrying levels.
The drastic increase in import of these two components can be linked to the woes faced by India's power industry. During 2012-13, India's average monthly deficit between production and supply of power was as high as 7,244 GWh, the highest in three years, with the states of south India accounting for more than 50% of the deficit.
In India, thermal power plants account for 55% of total installed capacity and the country is facing an acute shortage of domestically available coal, despite having virtually 10% of global coal reserves. According to Ministry of Power data, India experienced a shortfall of approximately 46.75 billion units of power in the past four years due to the coal shortage, of which around 12.25 billion units were lost during 2012-13. It is, therefore, natural for coal imports to rise.
When the power deficit widens and is sustained at high level, it is natural that manufacturers resort to generating their own power rather than idle plants and risk facing even larger losses. It is not a surprise, therefore, that diesel demand has shot up.
Another policy issue that hobbled India during 2012-13 was the virtual collapse of the mining sector, afflicted by widespread corruption, land and environment issues and virtual policy paralysis. Not surprisingly, iron ore exports fell 65% during 2012-13 to a mere US$1.6 billion, the lowest since 2003-04.
In such circumstances, it is not a surprise to see deterioration in the current account deficit. For the government, shifting the blame to gold imports is a convenient way of deflecting scrutiny from its own inefficiency and economic mismanagement".
Source:AsiaTimes
The full-year current account deficit (CAD) to GDP ratio hit 4.8%, up from 4.2% in the year to March 2012, even after a near 6% rise in exports in the fourth quarter from a year earlier and a 1% fall in imports. That brought the Q4 CAD deficit to 3.6% of GDP, down from 6.7% in the previous quarter.
The government singled out gold imports as the most important reason for the ballooning CAD, and there is a grain of truth in the assertion. Gold imports have risen since 2010-11. Yet this phenomenon can be attributed mostly to high inflation in India, resulting in the real rate of interest in India being negligible and even negative. It is therefore natural for domestic savers to turn to gold for succor.
Having said that, gold imports in the 12 months to March this year actually declined 4.75% from the previous year, falling in all but the third quarter on an annualized basis. For the full year, India's non-gold imports remained stagnant.
What is significant is the increase in oil imports, which rose 10.11% during this period, even as India recorded its lowest GDP growth in a decade ...
The rising volumes of oil and coal imports are two major reasons why India's CAD deteriorated to worrying levels.
The drastic increase in import of these two components can be linked to the woes faced by India's power industry. During 2012-13, India's average monthly deficit between production and supply of power was as high as 7,244 GWh, the highest in three years, with the states of south India accounting for more than 50% of the deficit.
In India, thermal power plants account for 55% of total installed capacity and the country is facing an acute shortage of domestically available coal, despite having virtually 10% of global coal reserves. According to Ministry of Power data, India experienced a shortfall of approximately 46.75 billion units of power in the past four years due to the coal shortage, of which around 12.25 billion units were lost during 2012-13. It is, therefore, natural for coal imports to rise.
When the power deficit widens and is sustained at high level, it is natural that manufacturers resort to generating their own power rather than idle plants and risk facing even larger losses. It is not a surprise, therefore, that diesel demand has shot up.
Another policy issue that hobbled India during 2012-13 was the virtual collapse of the mining sector, afflicted by widespread corruption, land and environment issues and virtual policy paralysis. Not surprisingly, iron ore exports fell 65% during 2012-13 to a mere US$1.6 billion, the lowest since 2003-04.
In such circumstances, it is not a surprise to see deterioration in the current account deficit. For the government, shifting the blame to gold imports is a convenient way of deflecting scrutiny from its own inefficiency and economic mismanagement".
Source:AsiaTimes
