High CAD huge challenge for India economy: ADB

Only positive out of the situation is that, so far CAD has not been financed by drawing down resources

India's high Current Account Deficit (CAD) of almost 5% in 2012-13 is a big challenge for the economy and is unsustainable in the long-run, though the overall growth momentum in the country is positive, Asian Development Bank's managing director general Rajat Nag said today.

He said that the only positive out of this whole situation of high CAD so far has been that it has not been financed by drawing down resources. "We at ADB feel that due to stabilising Euro, Japanese Yen and the US dollar, Indian exports will grow, which could have some positive impact on CAD in the coming months," Nag told reporters on the sidelines of the 46th Annual Meeting of The Board of Governors of Asian Development Bank (ADB).  

He estimated that CAD in 2013-14 would be somewhere around 4.4% which will further mellow down to 4.0 by the end of 2014-15.

Nag said the recent fall global commodity prices will have a positive impact on India because of its inelastic demand for oil, however, any further fall in prices should not be expected as demand from China will support it.

Gold prices in global markets dropped to almost $1,360 per ounce, around middle of April its sharpest fall in 30 years because of fading hopes of a strong recovery in the Chinese economy. Crude oil too had fallen to around $90 per barrel tailing gold around the same time. However, since then though prices of both the commodities has recovered both in the global markets and also domestically.

Nag said ADB is bullish on India though the Reserve Bank of India (RBI) has pegged growth in 2013-14 at 5.7% as softening global commodity prices will have less inflationary impact on the country and domestic demand has been robust.

He said recent structural reforms like the Cabinet Committee on Investments (CCI), partial decontrol of sugar and oil and measures which has helped in improving the general investment mood in the country.

“Though the fiscal deficit is still high, we felt that the target of 4.8% set by the government is achievable in 2013-14,” Nag said.

“Our interest is not in seeing India grow by 6-6.5%, but seeing Her grow by 8-9%, and we believe that if India can get its investment story right and manage to get a political consensus on reform measures like GST, it has the potential to grow at 8-9% annually,” the Managing Director General said.

On India’s tax structure, Nag said the country should focus on broadening its tax base and collecting it from people who don’t pay and not focus much on marginal tax rates. On the impact of expansionary monetary policies on assets volatility in developing and emerging economies, Nag warned that easy monetary policy adopted by Japan is good for that nation and also for the entire Asian economy, but it will not come without a cost. “We will have to watch out how this whole issue of QRs develop in the coming months,” Nag said.

On Brics Bank and its challenge to multilateral financial institutions like ADB, Nag said that Asia needs around $800 billion of infrastructure every year and ADB is only able to provide financing for around $21 billion, which means that need of the region is huge and if some other institution is there to supplement that it is good.

“As the centre of gravity in the world economy moves towards east and south, the power of institutions will also move towards countries  like India and China and it is inevitable for these countries to look for other institutions of funding which is also manifestation of monopolistic economic structure,” Nag said.

He said overall, the mood in the 46th Annual Meeting of ADB is much more positive than the 45th meeting because in 2012 people did not know what would become of Eurozone and Japan, but this year the mood is more positive among the delegates as the Eurozone crisis is no longer looked at as catastrophic, US economy is not doing great, but, is in a better position.

ADB's Growth Assessment

Country	2012	2013
All Countries	1	1.9
US	2.0	2.6
Eurozone	0.3	1.2
Developing Asia	6.6	6.7
China	8.2	8.0
India*	6.0	6.5

<sup>*In India the growth number is for financial year 2012-13 and 2013-14, while for rest it is calendar year

Source: ADB</sup>