Trade deficit adds to worry

New Delhi, Feb. 13: India posted its second highest monthly trade deficit of $20 billion in January, piling pressure on policymakers to raise prices of fuels and come up with schemes to unlock gold stashed away in households.

Oil and gold are the two biggest items in the country's import basket. The import bill for oil, the single biggest item bought by India, was a whopping $15.9 billion in January, 6.9 per cent higher than a year ago.

"The obvious policy lesson from the ever-widening deficit is that we need to make fuels costlier to discourage consumption… in a growing economy like India's, oil and mineral consumption will keep going up, but we must devise checks or else we will continue to spend faster than we earn," said senior finance ministry officials. The biggest trade gap of $21 billion was recorded in October 2012.

R.S. Butola, chairman of Indian Oil Corporation, said his company would be reviewing fuel prices later this week, a sure sign of another round of diesel and petrol price rise.

State-run fuel retailers are expected to increase diesel prices by 50 paise every month for the next few months. Analysts, however, ruled out any increase in the price of cooking gas with several states going to polls this year and early next year.

Exports rose a tad 0.8 per cent in January to $25.59 billion, while imports rose 6 per cent to $45.58 billion. While the marginal rise in exports from a phase of contraction is seen as a positive, rising oil import is a major concern.

The fast increasing import bill puts pressure on the rupee and devalues it against the dollar and other major currencies. While a devaluation could help exporters, it makes the import of oil and other goods, including machinery and minerals such as coal, costlier.

"The high current account deficit is unsustainable as it can't be funded for a long time with capital flows and it will get adjusted through the exchange rate," said A. Prasanna, chief economist with ICICI Securities.

The Indian currency started the year strongly, backed by foreign fund inflows of more than $6 billion into the bourses.

However, huge imports are expected to drag down its value over the next few months.

Over the last two years, a rising import bill and weak exports have seen the rupee falling from about 44 to the dollar in April 2011 to close to 54 levels.

Officials said the government had drawn up new schemes to wean Indians away from gold hoarding, including gold-backed pension and savings accounts.

These schemes give returns linked to the rise in gold prices and seek to break India's tradition of investing in physical gold.

India had last month raised import duty on gold and platinum to 6 per cent from 4 per cent to break the country's huge appetite for the yellow metal.

However, the Reserve Bank and the finance ministry are keen on a scheme to monetise India's estimated 20,000 tonnes of gold reserves worth around $1.16 trillion that are stashed away in households.

Gold bonds

One way out, as suggested by the All India Gems and Jewellery Trade Federation, is gold bonds.

Individuals can choose to keep gold with banks against bonds whose value will go up or down with the value of the bullion. The gold gathered could be on lent to jewellers, reducing imports. The government is believed to be evaluating the scheme.

The improvement in exports has been mainly on account of better performance by sectors such as engineering, textiles and gems and jewellery.

Exports have been contracting since May 2012.

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