India's twin deficits - fiscal and current account (CAD), have been a cause for worry for nearly 30 months now, fuelled by a host of domestic and international factors. Global uncertainty, choppy policymaking and short-sighted decisions have weighed down the two key macroeconomic indicators.
CAD is the difference between inflows and outflows of foreign currency and it has been blamed as a key factor that led to the depreciation of the rupee. But now, the monster called CAD appears to have been tamed, thanks to a drop in India's trade deficit. However, the good news does not end there. In what may come as a major relief to the government and the RBI, India's current account deficit fell to its lowest in eight years. India's current account deficit (CAD) for the quarter ended December stood at US $4.2 bn, or 0.9% of the gross domestic product (GDP), a sharp fall from US $31.9 bn (6.5%) in the year-ago period.
The fall in CAD is due to the government-imposed curbs on gold imports and the RBI's subsidy for non-resident Indians' US dollar deposits which boosted capital flows. In 2013, the government and RBI have taken aggressive measures to curb gold imports. For instance, the RBI restricted imports on a consignment basis by banks. A transaction tax of 0.01% was imposed on non-agricultural futures contracts including precious metals. India's biggest jewellers' association asked members to stop selling gold bars and coins, and the import duty on gold was raised to 10%.
With the CAD coming under control, the government could revisit the gold import curb. However in-order to the keep current account deficit within the central bank's comfort zone of up to 2.5% of GDP, the government needs to improve the business environment in the country, especially in terms of policy reforms. That will also facilitate foreign capital inflows.