Trade gap widens on gold rush

India’s trade deficit widened to a seven-month high of $20.1 billion in May, surging 18.8% on-year, as gold imports continued to remain high despite recent measures from the government and the Reserve Bank of India (RBI).

Imports slowed from a month ago but still registered a growth of 7% to $44.6 billion, mainly on gold imports, which account for around 11% of total imports.

Exports, on the other hand, fell 1.1% to $24.5 billion, reflecting muted external demand.

The RBI attributed the gold rush to a surge in festival-related or seasonal demand.

India is believed to have imported 162 tonne of gold in May.
This is expected to weigh heavy on India’s current account deficit (CAD), too.

“Clearly, April and May have been stressful. Data indicates that current account deficit in first quarter could be higher,” said Shubhada Rao, chief economist at YES Bank.

Though CAD is expected to moderate from the second quarter, the full fiscal figure could range higher by 4.1-4.5%.

“Available evidence suggests that a moderation in gold imports could be underway in June,” the RBI noted in its mid-quarter policy review on Monday.

The central bank is confident that softer global commodity prices and recent measures to dampen gold imports would help moderate CAD this fiscal.

For 2012-13, CAD is expected to weigh in around 5% when the data releases at the end of this month.

The main challenge is to reduce CAD to a sustainable level, while the near-term challenge is to finance it through stable flows, said RBI.

Finance minister P Chidambaram said the only way to contain CAD was to increase the domestic production of oil and coal and restrain the consumption of gold.

Ratings agency Crisil said the import cover for goods has fallen to 6.4 months in May from 7.1 months in March.