How will India tackle its widening trade deficit?

  • India’s trade deficit is now $13.35 billion
  • Surge in gold imports cited as the main cause
  • Exports contract for the first time this fiscal year on account of a weak global economy

India is now staring at a widening trade deficit with a four-fold surge in gold imports. Gold imports jumped to $4.17 billion from $1.09 billion a year ago. According to the trade data released by the Union Ministry of Commerce, India’s trade deficit in October increased by 26.06 percent to $13.35 billion from $10.50 billion in the previous year.

Will stringent regulations help curb gold imports?

Extreme measures in the form of taxes and stringent restrictions on gold imports were imposed last year after the rupee became a target of sell-off due to the country’s trade imbalance. These rules were only relaxed in May after India’s central bank was confident that the rupee was in a better position. Financing rules for jewellers were also relaxed. With the gold imports recording a tremendous surge this fiscal year, authorities are concerned that the growing trade deficit would again lead to a run on the rupee. It has been reported that the Reserve Bank of India is in talks with the new government to curb gold imports with new restrictions.

India’s biggest jewellery exporters oppose this move stating that they need relief from restrictions instead of more of them. This comes in the wake of 40% decline in sales during the diwali holiday season last year. “The government is no doubt concerned about the impact on the current-account deficit and wants to control it urgently, but an additional restriction on gold imports will have an adverse impact,” said Pankaj Parekh, vice chairman of the Gems and Jewelry Export Promotion Council, a lobby group that represents more than 3,000 exporters. “It will jack up domestic prices and hurt consumer demand.”

What is the outlook for exports?

Significantly, the data also revealed that exports contracted for the first time this fiscal year, with the pharmaceutical sector, gems and jewellery, cotton and carpets and engineering goods entering the negative growth zone. Exports were lower by 5.4 percent at $26.09 billion as opposed to $27.48 billion in October 2013. The fall in exports is largely attributed to the continuing weakness of Europe, weak recovery in the United States, Japan’s unexpected recession and a weak global economy.

Experts insist that normal gold imports post the festive season will help ease the trade deficit to a considerable extent. Low growth of exports however is here to stay with sluggish growth being recorded in India’s key export markets as well as lower prices of commodity intensive exports. In fact, WTO recently brought down the growth forecast for this year to 3.1 percent from 4.7 percent citing sluggish global growth.

References 

http://www.investing.com/news/commodities-news/india-to-take-imminent-steps-to-curb-gold-imports-317134

http://profit.ndtv.com/news/economy/article-trade-deficit-narrows-in-october-gold-imports-rise-nearly-300-on-year-698814

http://www.reuters.com/article/2014/11/17/india-cenbank-gold-idUSL3N0T73ZG20141117

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