Red flags on the economy...

Current account deficit widens to a new high fiscal deficit at 80.4 per cent of budgeted target

The struggling Indian economy ended the year 2012 with a pair of bad news – an all-time high current account deficit (CAD) and a fiscal deficit that touched 80.4 per cent of the budgeted target for the full financial year.

CAD widened to 5.4 per cent of the gross domestic product (GDP) in the July-September quarter, significantly higher than the 4.2 per cent in the corresponding period of last financial year, as export growth slowed more sharply than import growth, dragging the balance of payments into the red once again, Reserve Bank of India figures released today showed.

It is more than double of what RBI considers a sustainable level (2.5 per cent of GDP) when the economy is growing at a slow pace. The latest figures may dash the hopes of containing the deficit under 4.2 per cent for the entire financial year, as the external situation remains volatile and two important items of Indian imports — oil and gold — still exert pressure on imports.

In 2011-12, the country’s CAD stood at a record 4.2 per cent of GDP, higher than even the three per cent seen in 1990-91, the worst year of the balance of payments crisis.(CURRENT ACCOUNT DEFICIT)

On the other hand, the government’s fiscal deficit in the first eight months of the financial year was Rs 4.13 lakh crore. The Budget estimate had pegged the deficit at 5.1 per cent of GDP, but Finance Minister P Chidambaram had revised it to 5.3 per cent. Assuming nominal GDP grows by 14 per cent in 2012-13, as projected in the Budget, the fiscal deficit would turn out to be 77 per cent of the target.

However, it should be noted that the size of GDP might not grow at a rate as high as projected in the Budget, since real GDP growth could come down to 5.7-5.9 per cent and inflation could also not average eight per cent in the current financial year. The lower the GDP, the higher would be fiscal deficit as percentage of GDP.

In its Financial Stability report released on Friday, RBI had raised red flags on virtually every economic indicator of significance and consequence — decline in domestic growth, coupled with a relatively high rate of inflation, fall in domestic savings, particularly household financial savings, fall in investment demand and moderation in consumption. Today’s twin deficit figures would add two more red flags to the list.

Economists peg the fiscal deficit at close to six per cent of GDP for the current financial year.

Madan Sabnavis, chief economist, CARE , says the CAD figures have come as a shocker and global rating agencies would be quite concerned. Arun Singh, senior economist, Dun & Bradstreet, says the fiscal deficit was a big concern. “It will be 5.8 per cent of GDP. Three months are left in 2012-13 and it doesn’t seem likely that disinvestment target would be met.”

The Prime Minister’s Economic Advisory Council had earlier estimated CAD to come down to 3.6 per cent of GDP.

An RBI statement said CAD widened in the second quarter due to a larger trade deficit. This happened because merchandise exports declined at a higher pace than imports.

Brinda Jagirdar, head of economic research, State Bank of India, says the sharp rise in merchandise deficit reflects a higher pace of imports and moderation in exports. The services exports and remittances were not adequate to offset the merchandise imports.