India's lower current account deficit fuels economic optimism

MUMBAI (AFP) - India's current account deficit - the broadest measure of trade - narrowed to its lowest quarterly level in four years, fuelling optimism on Tuesday that Asia's third largest economy is on the mend.

The deficit slid to US$5.2 billion (S$6.5 billion), or 1.2 per cent of gross domestic product, in July-September compared to US$21.0 billion or five per cent of GDP in the same period last year, said the Reserve Bank of India (central bank).

"India's current account deficit is adjusting at a faster pace than expected by markets," said Siddhartha Sanyal, chief India economist at Barclays Capital.

The drop in the quarterly deficit to its lowest level since March 2009 was mainly due to rising exports and falling imports, particularly of gold, the central bank said in a statement.

India, the world's largest buyer of gold, has introduced strict measures to constrain imports of the yellow metal to lower its current account deficit, which hit a record US$88 billion in the fiscal year to March 2013.

The government has repeatedly raised import duties on gold which is the second biggest contributor, after oil, to India's deficit.

The high deficit had raised worries about a balance of payments crunch and put pressure on the rupee, which lost nearly a fifth of its value against the dollar earlier in the year before retracing some of its losses.

"The latest (deficit) number provides comfort," said Shubhada Rao, chief economist at private Yes Bank.

Finance Minister P. Chidambaram has said he is confident the current account deficit during the fiscal year 2013-14 will be contained at 4.8 per cent of GDP.

But Ms Rao said she was forecasting a current account deficit of around 2.7 per cent of GDP for the fiscal year ending March.

India last week posted stronger than expected economic growth of 4.8 per cent year-on-year for the second financial quarter to September, thanks to robust farm output and better exports.

And a business survey released on Monday showed manufacturing swung back to growth last month, boosted by an upturn in orders that prompted factories to increase output.

"We believe the economy has finally bottomed and will continue to pick up speed from here," said Credit Suisse economist Robert Prior-Wandesforde.

The government has said it expects growth of five per cent in the current financial year to March.

This would be the same rate as last year, which was a decade-low after India's nearly double-digit expansion just two years ago.

But the Congress-led government expects a pickup in growth next year to six per cent.

The scandal-tainted government is anxious to revive the economy before facing voters in general elections due by May.