NEW DELHI: India’s trade deficit widened to a seven-month high in May as gold imports surged while exports contracted, posing yet another challenge to the country’s troubled economy.A near-90% jump in annual gold imports was the chief reason for the trade deficit rising to $20.1 billion, from $16.9 billion in May last year. The country’s merchandise exports fell 1.1% to $24.5 billion, despite a depreciating rupee, as global demand remained weak and the government banned gold trading in Special Economic Zones (SEZs). Imports climbed 6.99% to $44.64 billion.”It (rising trade deficit) is worrisome…It is largely contributed by heavy imports of gold and silver,” said Commerce Secretary SR Rao.The widening trade deficit figures released on Monday are the latest in a series of gloomy macro-economic data. Last week, the government announced that industrial output had slowed down while retail inflation remained high. The rupee has depreciated by more than 6% against the dollar since May 1 and the Reserve Bank of India left its key lending rate unchanged on Monday as it is apprehensive that a weak rupee may fan prices
The demand for gold has remained high for a long time and rose sharply in April-May despite measures by the government to curb consumption as part of efforts to keep the current account deficit under control. The import duty on gold was recently hiked to 8%, from 6%.Since May 20, however, the daily demand for gold has fallen as the restrictions have begun to take effect. Some economists hope this will have a salutary impact on the current account deficit.
Dependence on Imports to Blame
“Recent restrictions will reduce gold import intensity, ease pressure on the rupee and help narrow current account deficit,” said DK Joshi, chief economist, Crisil.Madan Sabnavis, chief economist, CARE Ratings, however, said while current account deficit may come down marginally this year on account of restrictions on gold imports, it is unlikely to fall below 4% of GDP.
Chidambaram told the parliamentary consultative committee on finance that the huge dependence on imports of certain items such as oil, coal and gold was the major reason for the large current account deficit. The 7% depreciation of the rupee against the dollar did not help exporters as a depreciation in the currencies of India’s competitors, such as South Africa and Indonesia, against the greenback, evened out the effect.”The rupee’s depreciation has not pushed exports as demand is low, other currencies are also depreciating, import intensity of exports are on increase and high inflation is pushing input cost,” said M Rafeeque Ahemed, president, FIEO.
Source : Bullion Bulletin