India’s CAD expected to remain at around 5% of GDP in FY13 and FY14 says Nomura.

While domestic demand remains weak, India’s current account deficit is likely to remain elevated reflecting the supply-constrained nature of the Indian economy and the global new norm of high oil prices and weak exports, says Nomura

India’s current account deficit (CAD) widened to a record 6.7% of GDP in Q4 CY12 from 5.4% in Q3, worse than expected, due to a wider trade deficit (led by higher gold imports) and a lower-than-expected invisibles surplus. However, according to Nomura Research while domestic demand remains weak, the CAD would remain elevated reflecting supply constraints and the global new norm of high oil prices and weak exports.

During the fourth quarter to end December, India’s balance sheet has deteriorated. External debt rose to 20.6% of GDP in Q4 2012 from 19.7% in Q1, while the net international investment position worsened to -15.9% of GDP from -14% in Q1, due to rising external liabilities, Nomura says.

However, owing to seasonality and a payback in gold imports after the steep surge in Q4, Nomura says it expects the CAD to improve to around 4.5% of GDP in Q1 2013 and remain to about 5% of GDP, both in FY13 and FY14.

According to Nomura, the deterioration in India’s trade deficit has been ongoing for over a year due to a combination of weak exports and high oil prices. However, this was worsened by a sharp surge in gold imports in Q4 2012 due to the Diwali festival and preponement of gold imports in expectation of an impending import duty hike.

Moreover, while invisibles were better than in Q3 2012, they were lower than their year ago levels as remittances have flat-lined and investment income outflows have risen due to rising interest payments. Overall, the balance of payments (BoP) recorded a marginal surplus of $0.8 billion from a deficit of $0.2 billion in Q3, according to the Nomura report.

Nomura points to the basic weakness in government policy that the structural issues related to the current account deficit remain intact and policy measures continue to be aimed at funding the deficit rather than addressing it.

Source : moneylife.in