Govt should limit CAD to 2-2.5% of GDP: PMEAC

The government should try to limit the current account deficit (CAD) to 2-2.5% of GDP to shield the economy from volatility in capital inflows caused by global crisis, Prime Minister's economic advisory Council (PMEAC) said today.

While releasing the review of the economy 2011-12, PMEAC Chairman C Rangarajan said that the Current Account Deficit for the this fiscal would be 3.6% of GDP and for 2012-13 it could be 3%.

"The persistence of a large CAD in 2012-13 seems likely, even as it is not desirable. There is a need to take measures to ensure that the CAD is stabilised at a lower level of around 2–2.5% of GDP," Rangarajan said.

In the first half (April-September) of the current fiscal, CAD stood at 3.6%.

CAD occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers.

"While the position in regard of capital flows has greatly improved, it will however be judicious to try and limit the CAD...Especially as long as international financial markets continue to be adversely impacted by the troubles in the Eurozone," Rangarajan said.

According to PMEAC, capital flows in the form of Foreign Direct Investment (FDI) in the current fiscal would be $20.6 billion, against $7.7 billion in the previous fiscal.

However, FII investment is likely to decline to $4.9 billion, from $30.8 billion in 2010-11.

PMEAC further said that gold import in value term is expected to rise 76% to $58 billion this fiscal, from $33 billion last year.

However, it may come down to $38 billion in 2012-13.

The other major commodity whose import is adding to the CAD is crude oil. Oil import bill, as per PMEAC, will rise to $142 billion in the current fiscal.

Rangarajan further said that the total accretion to foreign reserves after paying the import bills would only be around $1 billion in 2011-12.