India's trade deficit hits 5-month high

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IndianRupee111 Reuters.

New Delhi - India's trade deficit hit a five-month high in March as merchandise exports fell for a second straight month, making it tougher for policymakers to lift curbs on gold imports that have helped to narrow the country's current account gap.

Asia's third-largest economy, which is struggling through its longest period of sub-5 percent economic growth since the 1980s, is seen vulnerable to any shift in capital flows.

Among the “Fragile Five” emerging economies, India suffered from massive capital outflows last year, in part on concerns over a bloated current account deficit, after the US Federal Reserve signalled a trimming down of its monetary stimulus.

Heavy outflows sent the rupee to a record low in August, prompting Indian authorities to build up foreign-currency reserves and clamp down on gold imports.

India's trade gap in March widened to $10.51 billion, its highest since October 2013, data from the Ministry of Commerce and Industry showed on Friday. Overseas sales of Indian goods fell 3.15 percent from a year earlier to $29.58 billion in March.

Merchandise exports for the 2013/14 fiscal year, however, grew 3.98 percent on year to $312.36 billion. Together with a 8.11 percent decline in annual imports, that helped sharply narrow the country's full-year trade shortfall to $138.59 billion from $190.34 billion a year ago.

“Extreme caution needs to be taken towards any liberalisation of gold imports because the risks of gold imports rising are very, very active,” said Saugata Bhattacharya, chief economist at Axis Bank.

He expects the current account deficit to be 2.1-2.2 percent of GDP in the fiscal year that began on April 1.

As a result of curbs on gold, imports of the metal have almost halved, scripting a dramatic improvement in the current account deficit that is estimated to have narrowed to 2 percent of GDP last fiscal year compared with a record high 4.8 percent a year ago.

The import curbs, however, have been deeply unpopular with Indian households who invest in the yellow metal to protect their savings from inflation and to provide gifts at weddings and on other special occasions.

Pressure is mounting on political parties to review the restrictions after national elections in May.

Such a move could reignite concerns over India's current account deficit as structural factors that keep it wide - such as weak manufacturing exports - are yet to be fixed.

Meanwhile, a stronger rupee is eroding the competitiveness of Indian exports, which contribute nearly 16 percent to the country's gross domestic product.

The rupee touched an eight-month high of 59.5950 on April 2, but has since given up the gains.

A rally in domestic shares on the back of heavy foreign buying has helped support the rupee.

Reserve Bank of India Governor Raghuram Rajan told a business daily last week the rupee at 55 to the dollar would be too strong. - Reuters



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