Weak oil to offset rising gold imports, CAD estimated at 1.4% of GDP
New Delhi (Dec 18) India's eternal love for gold has yet again emerged as a risk to its trade deficit, as imports of the metal surged to $5.6 billion in November from $4.2 billion in October.
Gold imports averaged at $2.6 billion a month between April and September. Thanks to a resurgence in gold imports, trade deficit widened to $17 billion as imports grew 26.8%.
Going by the run up in gold imports, concerns have emerged on India's external sector and if the Current Account Deficit would widen further on rising gold imports.
Economists are not particularly worried about rising gold imports for two reasons. First, the belief is that the increase in gold imports is largely due to the festive season and it cannot be interpreted as a secular trend. Second, gold is not the only culprit as far as India's rising imports are concerned, claim economists.
Sonal Varma of Nomura explains that excluding oil and gold, import growth rose to 27.6% year-on-year in November following the slack in October (5.5% year-on-year), which is indicative of a pickup in domestic demand. The expansion was a result of higher fertilizer (136.6%), coal (44.6%) and iron and steel imports (62.8%).
In addition to improving domestic demand, exports too have picked up in November compared to October as non-oil exports have picked up considerably. However, lower crude imports are expected to offset the impact of rising imports. Compared to the corresponding month last year, crude oil imports are down 9.7% to $11.7 billion, as India's crude basket hit a 50-month low of $77.58/barrel.
According to Saumya Kanti Ghosh of SBI, summing up both the positive and negative impact shows that the cooling crude prices would outpace the surge in gold import burden and would contribute a net $5 billion in narrowing trade deficit. This would drag CAD to as low as $30 billion which is expected to be 1.4% of GDP.
There is another perspective to the whole issue of surging imports. A granular look at imports that between 2005 and 2014, shows that the crude imports tops all other categories of imports.
However, the second big culprit is not gold. India has become a dumping ground for second hand capital goods, imports of which stand at $650.3 billion cumulatively over 2005 and 2014.
This also explains India's stagnating industrial production, says Ghosh, as India's becoming one of the biggest markets for second hand capital goods.
Import of capital goods is second only to cumulative crude imports at $9501.4 billion. Electronics imports are the third big category at $251.3 billion. And gold imports at $271 billion are not the biggest contributor to India's widening Current Account Deficit.
Source: BusinessStandard
