High reliance on crude import and affection for gold has left India in Current Account Deficit

1. 1
Economy
India is running in current account deficit for past 10 years due to
two main factors. Firstly, its high dependence on crude oil import
and secondly Indian's affection towards gold (for jewellery and
investment).
Segregation ofImports
31.45% 31.95% 34.48% 29.73%
9.74% 9.19% 5.91% 8.18%
7.67% 7.18% 6.81% 6.87%
6.72% 6.08% 6.48% 7.26%
44.43% 45.60% 46.33% 47.95%
0%
20%
40%
60%
80%
100%
FY12 FY13 FY14 FY15
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
Oil import Gold import Nuclear reactor
Machinery Others CAD as % of GDP (RHS)
Source - Ministry of Commerce
The above mentioned table reveals that ~ 40% of total imports are
on account of crude and gold import. In FY15, due to drastic fall in
crude oil from $ 110 per barrel to $ 50 per barrel combined with
fiscal measures taken on gold has marginally reduced import
percentage. The impact of fall in crude is not adequately reflected
in these figures as crude prices have declined at fag end of FY15.
CAD and its components
489
491
450
419
306
300
280
105
102
103
115
314
4.70%4.20%
1.70%
1.16%
0
100
200
300
400
500
600
FY12 FY13 FY14 FY15E
$bn
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Total Import Total Export - commodity
Total Export -service CAD as % of GDP (RHS)
Source-Ministry of Commerce/SPA Research
In recent years GOI has stepped in to control CAD specially to
curb gold import through measures like 80:20 scheme and custom
duty hike. Reduction in gold import along with some help from
reduce crude price has translated into decline of CAD from 4.2%
in FY12 to around 1% in FY15E.
CAD
June 09, 2015 EVENT UPDATE
Gold held by household
0
5000
10000
15000
20000
25000
India China Turkey
Tonnes
Source - World Gold Council, Media Reports
Further, GOI's plan of Monetise gold present in the country is
considered as major step to contain CAD. The scheme intends to
bring into circulation the gold locked in household and temple
trusts. The government is likely to exempt the scheme from wealth
tax, capital gains tax and income tax will boost chances of its
success. The tenure of gold deposits is likely to be for a minimum
of one year and interest will be paid on such deposit. Customer
will have the choice to take cash or gold on redemption. India has
adequate gold reserve ~20000 tonnes, if it is brought into
circulation can be a game changer for the economy.
Gold Import
0
200
400
600
800
1000
1200
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Tonnes
Source - SPA Research
On an average India imports ~850 tonnes of gold every year. If
Govt manages to satisfy 50% of total demand of gold through this
scheme, it will result in saving of $ 18 bn assuming gold price
stays at $ 1150 per ounce against FY15E CAD of $ 24 bn. Ceteris
Paribus, deficit will reduce by 75%.

2. 2
Economy
Impact on CAD from import substitution of gold
Gold price Savings (in $ bn)
USD/oz
If 50% demand is met If 100% demand is met
through Import through Import
1150 16 34
1250 14 34
Crude Oil prices are down by ~41% & ~35% from April 2014 &
October 2014 respectively and are expected to hover between
$50-$70/barrel in the medium term. This is due to the fact that
OPEC member countries are not taking production cuts fearing
loss of market share and budgetary imbalance. Further, production
from shale oil field will increase by 5 lacs barrel per day as crude
moves above $65 per barrel.
Impact on CAD from import and export of oil products
Products Units Lacs MT Outflow USD in bn,
if Indian crude Basket
FY15 FY16E $60/bbl $70/bbl
Import
Crude 1894 1962 83.34 97.22
LPG 83 96 4.07 4.75
Petrol 4 6 0.26 0.30
HSD 1 2 0.08 0.10
Others 114 120 5.09 5.94
Outflow (in $ bn) 93 108
FY15 Import (in $ bn) 125 125
Savings (in $ bn) (A) 32 16
Export
Naptha 68 67 3.52 4.11
Petrol 160 168 8.88 10.36
HSD 256 284 15.02 17.53
Others 153 162 8.57 10.00
Net Inflow (in $ bn) 36 42
FY15 Export (in $ bn) 47 47
Shortfall (in $ bn) (B) 11 5
Net Savings (in $ bn) (A-B) 21 11
% of GDP 0.94% 0.49%
India is amongst the biggest beneficiary of decline in oil prices as
~75%-80% of India's oil consumption is met through imports. So
any decline in oil prices will have positive impact on CAD. If crude
price settles around $ 70 per barrel in FY16, India import bill
from crude will reduce from $ 125 bn in FY15 to $ 108 bn in FY16E
resulting in saving of $ 16 bn. However, export of petroleum
products will also reduce from $ 47 bn in FY15 to $ 42 bn in FY16E,
translating to reduction of $ 5 bn. Hence, current account deficit
will reduce by $ 11 bn. (0.50% of FY16E GDP)
Sensitivity Analysis of CAD (in $ bn)
Gold monetization Scheme
Indian crude basket
$60/bbl $65/bbl $70/bbl
0% (3) (8) (13)
50% 13 8 3
100% 31 26 21
The above matrix highlights various scenarios and its impact on
CAD which can vary in the range of 0.50% to surplus of 1.40% of
FY16E GDP depending upon various scenarios. Assuming crude at
$70/bbl and zero gold import substitution from gold monetization
scheme, CAD is expected to be $13 bn or 0.59% of FY16E GDP from
1.16% in FY15E. At this level, financing CAD will not be a big issue
with stable FDI of ~$20bn (0.9% of GDP), which will lend stability
to rupee in case US federal reserve starts raising interest rate
later this year.

3. 3
Economy
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