In April, a top commerce ministry official told a group of financial journalists “not to be alarmist” over rising gold imports. The reporters wanted to know if the government was planning any action in the wake of a sudden and sharp spike in gold imports in the preceding month. The official assured them that the government was keeping a watch and would take action, if needed, at an “appropriate time.” Looking back, it appears the authorities may not have been as alert as they ought to have been, or that they erred in reading the situation.
Data released by the Reserve Bank of India (RBI) on Friday showed India’s current account deficit (CAD) rose sharply to a four-year high of $14.3 billion, or 2.4% of GDP, in the April-June quarter. It was $3.4billion, or 0.6% of GDP, in the preceding quarter. Current account deficit is the difference between the value of goods and services a country exports and imports. A higher CAD is not necessarily bad if the bulk of it is on account of such imports that help exports and growth and is financed through higher inflow of foreign direct investment. Historically, in the Indian context, a CAD below 3% of GDP is considered sustainable. On the face of it, therefore, a CAD of 2.4% in April-June may not appear worrisome. But a closer scrutiny of why and how the deficit widened so fast will call for remedial measures that must be taken without losing time.
The CAD has widened because imports have grown much faster than exports. Imports have risen faster because of a surge in gold imports and, to some extent, a higher cost of crude oil in the global markets.
