Rising price of gold could mean falling current account deficit

As gold prices touched a record high on Thursday, the gloomy current account deficit (CAD) situation could see a silver lining.

The rising gold prices coupled with falling imports of the metal will have a dampening effect on CAD, DK Joshi, chief economist Crisil, told The Indian Express. He said that in the current fiscal, CAD is likely to settle around 3.1-3.2 per cent of GDP against 4.2 per cent during the last fiscal.

Earlier, the Prime Minister's Economic Advisory Council (PMEAC) in its Economic Outlook 2012-13 pegged the CAD at 3.6 per cent of GDP for the current financial year.

The PMEAC, chaired by C Rangarajan, said that the rising gold prices along with high inflation and shortcomings in the marketing of financial savings instruments like mutual funds had "over the past couple of years, resulted in a huge increase in the import of gold into India for investment use."

"This factor has contributed to a great extent to the worsening of the external payment situation and the availability of financing savings for productive use at home," the PMEAC had said.

The appetite for gold is expected to dampen with the rise in price. In effect, though the value of existing gold will increase, it would have a moderating impact on new demand. "This (increase in gold prices) will have a beneficial impact on CAD. It will be around 3.8 per cent of GDP by the end of the year," said Saugata Bhattacharya, economist, Axis Bank. Gold imports comprise 10 per cent of India's total import bill.

During the last financial year, gold imports stood at $60 billion, partially responsible for the high CAD. In 2010-11, gold import was $40 billion. The CAD recorded a 30-year record high of 4.2 per cent of the GDP last year.

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