Will not meet rupee decline with capital control: PM

Says government is confident of lowering current account deficit to $70 billion this fiscal

Prime Minister Manmohan Singh today said that the rupee fall was a matter on concern but the government will not meet the rupee decline with capital control measures.

Singh said the sharp dip in rupee was due to unexpected external factors, adding that Fed tapering has caused general weakness in global currencies.

The rupee's tumble is a "matter of concern" but is part of a needed adjustment due to India's large current account deficit, he told the Parliament.

The depreciation will have a positive impact on export competitiveness in coming months, he added.

Singh said the current account deficit was "unsustainably large" and to remedy this there needed to be a reduction in demand for gold and oil imports. He said the government is confident of lowering current account deficit to $70 billion this fiscal.

The Prime Minister said the medium term objective of the government will be to reduce CAD to 2.5% of GDP and the government will make all efforts to maintain "a macro economic framework friendly to foreign capital inflows to enable orderly financing of the current account deficit".

 

Emphasising that the country's overall public-debt to GDP ratio has been declining, he said India's external debt is only 21.2% of GDP while short-term stands at 5.2%.

"Our forex reserves stand at $278 billion, and are more than sufficient to meet India's external financing requirements," he said.

Regarding fiscal deficit, the Prime Minister said the government will do whatever is necessary to contain the fiscal deficit to be 4.8% this year.

"The most growth friendly way to contain the deficit is to spend carefully, especially on subsidies that do not reach the poor, and we will take effective steps to that end," he said.

Growth in first quarter of 2013-14 likely to remain flat, he said. Singh added that India's economy should pick up in the second half of fiscal year 2013/14 but there will also be pressure on inflation because of the rupee's sharp decline.

Singh said that depreciation of the rupee and rise in dollar prices of petroleum products "will no doubt lead to some further upward pressure on prices".

Noting that the Reserve Bank of India (RBI) will continue to focus on reducing inflation, the Prime Minister said that favourable monsoon and the anticipated good harvest will help bring down food prices and ease the task of controlling inflation.

Regarding domestic banking sector, Singh said there has been some rise in bad loans.

"The question that needs to be asked is whether there is a liquidity problem or a solvency problem for the borrowers. My belief is that there is a liquidity problem. Our banks are fortunately well capitalised much above the Basel norms and have the capacity to provide for any non-performing assets until those assets are turned around," he said.

Singh said we have difficult reforms ahead such as subsidy reduction, opening of insurance and pension, implementation of GST.