India’s current account deficit hit an all-time high of 6.7 percent of the country's GDP for the quarter ended December 2012, raising concerns over Asia’s third largest economy’s weak finances.
India's worse-than-expected Current Account Deficit (CAD) for the three-month period was down due to rising imports of oil and gold, while exports recorded flat growth for the period owing to a global slowdown. The CAD stood at $US 32.6 billion for the third quarter of the fiscal year 2012-13, compared with analysts average forecast of a 6 percent deficit on GDP.
The Current Account Deficit -- which represents the gap between inflows of foreign currency and outflows -- was 5.4 percent of the country's GDP in the previous quarter and 4.4 percent in the third quarter of last year. For the nine months ended Dec. 31, 2012, CAD stood at 5.4 percent of GDP, up from 4.1 percent recorded in the same period the previous year.
The discouraging numbers would restrict the Reserve Bank of India from easing monetary rates further and boost the inflationary pressures on the economy. The Reserve Bank of India, India's central bank, in its recent monetary policy review had said that the high CAD reading has limited the scope for cutting key policy rates.
Responding to the CAD figures, the Indian government said it expected the deficit to moderate in the fourth quarter as the exports showed signs of recovery in the current quarter as global demand improved. The government said it will take all steps needed to tackle the problem.
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However, India's industrial sector felt more is needed to boost external trade and investment inflows.
“The performance of the country on the external trade and investment front during October-December quarter is extremely disappointing. Current account deficit reaching the 6.7 percent level is untenable,” Rajkumar Dhoot, president of the Associated Chambers of Commerce and Industry, or Assocham of India, told the Press Trust of India (PTI).
Merchandise export growth was muted in the quarter, while it grew 7.6 percent in Q3 of 2011-12. Imports, on the other hand, grew 9.4 percent, boosted largely by oil and gold demand in the third quarter.
Nevertheless, inbound investments to the country increased in the third quarter, enabling India to fund this year’s third quarter gap, in the quarter. But these fund inflows can be reversed in the event of a possible external shock to the markets or panicking foreign investors. Such a scenario would leave the balance of payments at risk, Business Standard pointed out.