CAD declines sharply on imports contraction: India Ratings

Indian exports grew 4.0% yoy in FY14 from a contraction of 6.3% in FY13 and 1.8% in FY12.

May 28, 2014 10:53 IST | India Infoline News Service
India Ratings & Research (Ind-Ra) believes a recovery in exports, moderation in imports and a rise in net invisibles (services earnings plus remittances) led to India’s current account deficit (CAD) declining sharply to US$32.4bn (1.7% of GDP) in FY14 from US$87.8bn (4.7% of GDP) in FY13. This remarkable turnaround is much better than the agency’s forecast of US$38.8bn (2.1% of GDP). The steps taken to curb gold imports by raising import duties and other measures have paid off too. Gold and silver imports dropped to US$33.4bn in FY14 from US$55.8bn in FY13. Ind-Ra, however, expects CAD to expand to US$45.4bn (2.1% of GDP) in FY15 on the back of a mild industrial recovery. 

Exports Growth Turns Positive: Indian exports grew 4.0% yoy in FY14 from a contraction of 6.3% in FY13 and 1.8% in FY12. Fitch Ratings Ltd. expects the US to grow at 2.6%, the eurozone at 0.9% and the UK at 2.3% in 2014. However, it is still short of a full recovery and would require sustained policy efforts. 

The segments which witnessed significant growth in exports in FY14 are handicrafts (36.0%), transport equipment (16.5%), leather and leather products (16.5%), textiles (15.2%) and chemicals and chemical products (5.4%). Merchandise exports showed some weakness in 4QFY14 and contracted 1.3% after witnessing growth of 7.5% in 3QFY14. However, Ind-Ra expects exports growth to increase in the near term in view of the World Trade Organisation’s projection of 4.7% growth in world trade in 2014. 

Imports Shrink: Merchandise imports at US$466.2bn contracted 7.2% yoy in FY14 as against an increase of 0.3% yoy in FY13. Consequently, trade deficit improved to US$147.6bn in FY14 from US$195.7bn a year ago. Although Ind-Ra expects some pick up in imports growth in FY15, it will be modest due to stable crude prices, lower gold imports and limited upside in GDP growth. 

Remittances Remain Steady: Remittances from aboard have remained steady at around US$63bn-US$65bn since FY12. They came in at USD65.3bn in FY14. However, net invisibles at US$115.2bn in FY14 were higher by US$7.7bn than those in FY13 mainly on account of higher net earning under the software and business services heads which increased by US$3.4bn and US$3.2bn, respectively. 

Net Capital Inflow Declines: Net inflows under the capital and financial account declined to US$48.8bn in FY14 from US$89.3bn during 2QFY14. However, inflows under different heads of capital and financial account were rather mixed. Portfolio investment witnessed a net capital inflow of US$4.8bn in FY14 as against US$26.9bn in FY13. While foreign investment and loans witnessed a lower yoy inflow, banking capital and foreign direct investment witnessed a higher yoy inflow in FY14. 

Forex Reserve Up: Despite a lower capital inflow, a substantially improved CAD led to a significant rise in forex reserve. It increased by US$15.5bn in FY14 from US$3.8bn in FY13. Ind-Ra expects the accretion to forex reserve to expand by US$15bn in FY15. Compared with 1QFY14 and 2QFY14 when the forex reserve witnessed a drawdown, the third and the fourth quarters witnessed an accumulation of reserve. Consequently, the Indian rupee which had depreciated by 15.4% between end-March 2013 and end-September 2013, appreciated by 4.3% between end-September 2013 and end-March 2014. The rupee is currently trading at Rs. 58-59/USD. Ind-Ra expects the currency to trade at 57-58/USD by end March 2015. 

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