India’s Current Account Deficit a Mounting Cause for Concern

January 3, 2013 in India

A rising oil bill, persistent gold imports and falling exports are ganging up to create a rising current account deficit headache for India’s Finance Minister, P Chidambaram.

The deficit is now 5.4% of the country’s GDP, as per figures released for the September quarter.

One of the measures Chidambaram may take is to make it more expensive to import gold. Indians are known for their voracious appetite for gold for investing, and for gifting during marriages and ceremonies. As a result, India is one of the biggest importers of gold globally. The most obvious route may be to hike duties further on import of the yellow metal, even though the import duty was doubled in March to 4%.

However, Chidambaram sees no reason to panic, considering investment flows from foreigners may be sufficient to finance the deficit. In addition, the country has about $296.5 billion in currency reserves, which, by themselves, are the equivalent of seven months of imports.

This puts the focus on flows from FIIs and FDI, and the need to make the country’s investment climate more attractive through reforms and therein lies the rub. India’s coalition politics make it difficult to push through radical reforms, though a start seems to have been made in retail.


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