On September 30, the Reserve Bank of India (RBI) released its quarterly report on the major developments impinging on the country’s balance of payments (BoP) during the first quarter of the year (April-June 2013-14). Simultaneously, a report on the country’s external debt was also released. There are important messages from both the reports.

High up in today’s list of macro-economic concerns has been the size of the current account deficit (CAD). Recently, it had threatened to go out of control, posing a great threat to macro-economic stability. The deficit was estimated at 4.8 per cent of gross domestic product (GDP) at the end of 2012-13, worse than the 4.4 per cent in 2011-12. Comfort levels for policy makers are substantially less.

According to the RBI report, the CAD in Q1 was $21.8 billion (or 4.9 per cent of GDP). It was $16.9 billion (or 4 per cent) in Q1 of 2012-13. There has been an increase in imports and a decline in merchandise exports. Exports, however, declined at a slower pace than in the previous year — 1.5 per cent to $73.9 billion in Q1 of 2013-14 compared with a decline of 4.8 per cent at $75.8 billion over Q1 of 2012-13. In contrast, merchandise imports recorded an increase of 4.7 per cent ($124.4 billion) in Q1 of 2013-14 as against a decline of 3.9 per cent (at $118.9 billion) the previous year.

According to the press release, the steep increase in imports in Q1 of this year is attributed to a steep rise in gold imports during the first two months of Q1.

That statement is significant in that it once again underlines what has been a principal cause for the imports surge recently.

Control gold imports — through fiscal and administrative measures — and you can get a handle on the CAD.

As if buttressing that viewpoint, the RBI release has gone out of the way to point out that if gold imports of $7.3 billion in Q1 over the corresponding quarter of the previous year were excluded, the CAD would work out to $14.5 billion which translates into 3.2 per cent of GDP. For the record, CAD during Q4 of 2012-13 the previous reporting quarter was 3.6 per cent.

However desirable such an outcome would be, the sad fact is gold imports can never be eliminated and for a long time to come will figure as one of the principal causes behind the trade and, therefore, current account deficits.

Nevertheless, the high CAD of 4.9 per cent in Q1 notwithstanding, many analysts believe that the worst is over as far as India’s BoP is concerned. Reason for such optimism lies in the performance of imports and exports from the beginning of the second quarter (July-September 2013-14). Gold imports have been declining and even more significantly exports have been on the rise. Obviously, the sharp rupee depreciation is helping a range of industries enhance their export competitiveness. The recovery in the U.S. is another contributory factor. The rupee depreciation has made imports costlier possibly encouraging the sourcing of alternative products within India. However, it is not at all certain that even discerned, these positive trends will sustain over a period to make a real dent on deficits.

Services exports, especially from the IT and ITeS industries, are expected to do well as the rupee’s fall helps them. However, concerns over the external sector in its entirety remain.

One, the current account will continue to be under pressure because of high coal imports and negligible iron ore exports. The mining industry has been bedevilled by policy issues and judicial intervention. These will take time to be resolved.

Two, India’s external debt situation is a cause for worry, dominated as it is by short-term debt (with a residual maturity of less than a year). The government’s desire to fund the current account by whatever means is one of the reasons for the high level of short-term debt. Policy measures justified on expediency have a flip side, which is becoming obvious.

In short, the picture might be less gloomy but the external account is still not out of the woods.