After months of bad prophecies about the drooping Indian economy, we finally get to hear some good news. With the rupee facing an all time low some seven months back and the rising trade deficit being the main culprit behind the same, the culprit now bring the much awaited relief. Our trade deficit shrank to $9.92 Billion recently which will narrow down the CAD. Though our exports rose at a depressingly modest rate, the sharp fall in imports led by gold narrowed the gap. Economists firmly believe that the outlook on CAD will continue to be positive and that 2014 CAD will be closer to 2% of India’s GDP.
Although this is a good scenario in all, there are certain “Not so good” elements also present here. Exports rose at a rate of 3.79% in January unlike until October, when there was a double digit growth rate. The slowdown in exports may spell trouble for the Indian economy, which has been struggling with high inflation and slow growth. Inspite of the Engineering and garments exports doing well, exports seem to be doing not so well. The sluggish gem and jewellery exports are the main reasons of this slowdown. Also the unexpected maintenance shutdown by energy giant Reliance Industries, India’s biggest exporter of petroleum products and second-biggest company by market value led to a sharp decline in exports. Apart from this a reduction in pharmaceutical exports has also been recorded.
Experts anticipate a pickup in Indian exports due to recovery in the domestic market. The government hopes that an improvement in economic conditions in the U.S. and the euro zone will help boost the exports. Shubadha Rao, the chief economist at YES bank says that fall in Taiwan’s exports and the China slowdown will help in improving the relative level of confidence for Indian markets at a time when other emerging market nations are benching with slowdown related fears.
With the reduced CAD which is mainly due to a sharp cut in gold imports, comes the threat of smuggling. Now the government is looking at relaxing the constraints on gold which had been put earlier to curb the gold import. The Finance Ministry raised duty on gold to 10% from 2% and also imposed the 80-20 rule (wherein 20% of every consignment of imported gold has to be exported) which resulted in 37% fall in gold imports in April-January from a year ago. Even the RBI governor said that as now the CAD is at a comfortable position, some relaxation can be expected. Easing gold imports seems to be the next big step now.