During April, India's gold imports rose 138% to about $7.5 billion as consumer demand for the yellow metal shot up significantly. This has mainly led to widening of the CAD, says Nomura
The Indian government’s move of hiking the import duty on gold to 6% to curb imports of the precious metal to check the widening current account deficit (CAD) seems to have failed. According to Nomura Research, during April, India's gold imports rose 138% to about $7.5 billion as consumer demand for gold shot up significantly.
“Consumers likely brought forward their purchases in response to the recent sharp fall in gold price. As a result, higher gold import volumes offset the price effect. With consumers bringing forward their gold purchases and weak seasonality, we expect the trade deficit to worsen much more sharply in May,” Nomura said in a research note.
Gold imports in 2011-12 amounted to $56.5 billion and in the financial year 2012-13, till December, they are estimated at $38 billion.
After narrowing to a two-year low, India’s trade deficit worsened to $17.8 billion in April from $10.3 billion in March. Exports rose by 1.6% y-o-y in April, down from 7% in March, while imports rose by 10.9% y-o-y following a 2.9% contraction in March. Non-oil imports remained largely unchanged at $27.8 billion in April, while oil imports rose to $14.1 billion from $13.3 billion.
According to Nomura, the trade deficit worsened due to three key factors, sharp pick up in gold demand, weak exports and seasonal factors.
Sharp pick up in gold demand:
Although gold imports during April rose sharply, Nomura says the recent fall in gold prices suggested that gold import volumes should moderate this year. “This is not yet happening, but we see the recent rise in gold imports as a bunched up rise in consumption demand, which should fade over the coming quarters. Indeed, excluding oil and gold, import growth remains in negative territory, reflecting weak domestic demand. Hence, we expect this combination of weak domestic demand and low oil/ gold prices to lead to a marginal improvement in the current account deficit to around 4.3% of GDP in FY14 from around 5% in FY13, although this is still above a sustainable level,” the report added.
Nomura says momentum in external demand has weakened. “On a three-month seasonally adjusted annualised basis, we estimate that exports rose 12% in April, down from 19% in March, suggesting some moderation in external demand,” the report says.
India's trade deficit tends to seasonally worsen in April due to higher imports. With gold imports higher, the seasonally adjusted trade deficit rose to $17 billion from $15.7 billion in March.