India’s CAD and Core Sector Growth Show Some Improvement

The rising Current Account Deficit (CAD) has been the primary worry for the Indian markets for some time now. To control the same, the Indian government has taken various steps like curbing gold imports and trying to increase the exports by incentivising exporters.

If the recent data on CAD is anything to go by, India’s external economy didn’t deteriorate as badly as expected in the June 2013 quarter. In addition, it seems that the government’s efforts to rein in gold imports have paid off as the core sector grew at its strongest pace in seven months, bringing in more good news for an embattled economy that’s yet to show any definite signs of revival.

If we take a look at the CAD (the difference between spending overseas and earnings), this widened to 4.9% of the GDP in the June 2013 quarter from 3.6% in the March quarter. In absolute terms, the CAD for the June 2013 quarter stood at USD 21.8 billion, up from USD 18.1 billion in March 2013. While the numbers remain higher than the comfort levels, the positive aspect has been a lower gap than the consensus estimate of USD 23 billion.

Though there has been some amount of improvement, we feel it would be difficult for the government to meet its target of restricting the CAD to USD 70 billion. In the last fiscal, this was at USD 87.80 billion and we expect it to be over USD 92 billion in FY14.

The fiscal deficit for April-August was 74.6% of the budget estimates against 65.7% in the same period last year, which suggests that the government will need to start expenditure reduction in all earnest if the fiscal deficit target of 4.8% of the GDP for the year is to be achieved.

Core Sector Growth

While the better-than-expected CAD figures spelt good news, investors also found solace in the core sector growth data. Core sector output rose 3.7% in August 2013 from 3.1% a year ago, suggesting a pickup in industrial growth from 2.6% in July. The core sector has 38% weight in the Index of Industrial Production (IIP), so this may provide some impetus for industrial growth too. However, it may lead to further tightening from the RBI.

Though the factors are positive, we feel that their impact will be short-lived. Hence, a prudent strategy will be to book profit at the higher levels.