Twin deficits widen, trade gap may soon ease

By Suvashree Dey Choudhury and Subhadip Sircar

MUMBAI (Reuters) - The current account deficit grew less than expected in the June quarter and is tipped to ease in coming months as a pick-up in exports and lower gold imports improve the trade balance, offering relief to the battered rupee.

But the country's fiscal gap widened sharply in the first five months of the financial year, putting pressure on the government to spend less in the run-up to national elections or risk missing its stated aim of cutting the budget deficit.

The high current account gap has made it especially vulnerable to a surge in capital flows out of emerging markets in recent months, sending its currency down as much as 20 percent this year.

The rupee hit a record low on Aug 28, although it has since recovered some of the lost ground.

The current account deficit (CAD) for the three months through June was $21.8 billion, or 4.9 percent of gross domestic product, driven by sluggish exports and high gold imports in April and May before the government hiked tariffs on the metal to a record 10 percent.

Five economists had predicted the deficit would rise to $23-$25 billion.

The lower-than-expected figure was due in part to stronger inflows from software exports, helped by the weaker rupee.

"Risk of high CAD has receded to a considerable extent but (the risk) is alive on the fiscal deficit," said A. Prasanna, an economist at ICICI Securities Primary Dealership.


The fiscal deficit rose to 4.05 trillion rupees for the April-August period, or 74.6 percent of the full fiscal year target, higher than the 65.7 percent at the same point a year ago.

The government has set a target of trimming its fiscal deficit to 4.8 percent of GDP in the fiscal year through March but the Congress party-led administration, which faces elections by May, could find it hard to cut back on subsidy spending.

"The government should build on the gains on the external front by taking corrective measures like cutting expenditures to achieve the fiscal deficit target," Prasanna said.

The June-quarter current account deficit was wider than the gap of $18.17 billion, or 3.6 percent of GDP, in the quarter ending in March.

Economists expect the gap to ease as the duty on gold has constricted imports, with improving global demand and the weaker rupee bolstering exports.

A narrowing current account deficit would reduce India's reliance on foreign money to fund the gap.

Since hitting a record low 68.85 to the dollar, the partially convertible rupee has gained about 10 percent and closed on Monday at 62.60.

Balance of payments slipped marginally into deficit for the June quarter at $346 million versus a surplus of $2.68 billion in the March quarter.

Also on Monday, India reported that output for the infrastructure sector rose 3.7 percent year-on-year in August, its biggest gain since January, mainly driven by coal, cement and electricity production.

In the fiscal year through March 2012, infrastructure output grew 3.2 percent compared with 5 percent in the previous year.

(Writing by Tony Munroe; Editing by John Stonestreet)


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