PM's advisors differ with finance ministry

Say CAD can't be fully financed without drawing from reserves; 4.8% fiscal deficit target tough

The Prime Minister's Economic Advisory Council (PMEAC) on Friday differed with the finance ministry's optimism that the current account deficit (CAD) would be fully financed in 2013-14 without drawing from the foreign exchange reserves.

It also said containing the Centre's fiscal deficit at 4.8 per cent of gross domestic product (GDP) in 2013-14 would be a challenge.

Though agreeing with the ministry that the CAD would come down to $70 billion (3.8 per cent of GDP) in 2013-14 from $88 billion (4.8 per cent of GDP) in 2012-13, the council in its Economic Outlook for 2013-14 estimated net capital flows at just $61.4 billion this year, necessitating withdrawal of $8.6 billion from forex reserves to finance the deficit on the current account.

Council chairman C Rangarajan tried to play down the differences with the finance ministry on this front, saying the situation could improve.

Gold imports, one of the reasons for the widening trade deficit, were projected to fall to $38 billion this financial year from $53.8 billion in 2012-13. However, Rangarajan cautioned there could be an increase in gold imports in the coming festive season.

The PMEC said it expected the investment rate to fall to 34.7 per cent of GDP in 2013-14, against 35 per cent a year ago. To improve the investment climate, it prescribed a host of measures, including sorting transfer pricing issues with companies and addressing tax issues in sectors such as electronics.

The council said it would be a challenge to contain the fiscal deficit at the projected 4.8 per cent of GDP, and prescribed cutting discretionary expenditure and restructuring of subsidies.

With the Reserve Bank of India (RBI) scheduled to announce its monetary review next week, Rangarajan said the central bank was in a dilemma on the stance to take due to issues on prices, the rupee and growth fronts. However, he said he expected RBI to continue with its tight stance till the foreign exchange market stabilised.

The council cut economic growth to 5.3 per cent in the current financial year from its estimate of 6.4 per cent. Though this was a shade lower than Prime Minister Manmohan Singh's expectations of 5.5 per cent, independent analysts have pegged growth at sub-five per cent.

PLUSES & MINUSES
* Growth to get a boost from agriculture
* US Quantitative Easing tapering already factored in by markets
* Services growth to fall to 6.6% in FY14 from 7.1% the previous year
* Manufacturing growth still a concern
* WPI-based FY14 inflation at 5.5%, against RBI's projection of 5%
* Investment climate deteriorated due to some "non-economic" issues
* FII investments to be just $2.7 bn in FY14, against $26.9 bn the previous year
Prescription: Govt should ensure stable FDI regime, develop bond markets, intervene strategically in energy sector