RBI raises concern on rising current account deficit

A senior Reserve Bank of India official has raised concern on the country’s widening current account deficit (CAD), saying it is already far above a level sustainable for India.

“The Reserve Bank’s own research shows the economy can sustain a CAD of about 2.5 per cent of GDP under a scenario of slower growth,” said Deepak Mohanty, executive director, RBI, in a speech at an event in Bhubaneswar. CAD as a proportion of GDP was marginally up to 3.9 per cent for the first quarter of 2012-13 from 3.8 per cent for the same quarter in 2011-12. Last week, Prime Minister's Economic Advisory Council Chairman C Rangarajan, had also said there was a need to bring down the current account deficit to 2.5 per cent over a period of time.

Mohanty says India’s current account remains particularly vulnerable to developments in the trade account. “Since India’s linkage with the world economy, in terms of trade and finance, is likely to grow, it is important that resilience in its trade account is built up mainly by promoting productivity-based export competitiveness and improving the domestic fundamentals that are supportive of least costly non-debt creating flows, particularly foreign direct investment (FDI),” he said.

There is a also need to reduce imports and boost merchandise exports to bring the CAD to sustainable levels, said Mohanty. This is because a slowing global economy and protracted high levels of unemployment in advanced economies make it difficult to boost services exports in the short run.

If the slowdown continues, it could also have an adverse impact on inward remittances.

The ED also says there is a need to reduce the vulnerability from high oil and gold imports. “While oil has been a major component of India’s imports, the sharp increase in demand for gold has put an additional pressure,” he said.

Mohanty felt the current policies on diversifying the export basket, both destination and products, need to be stepped up. “Indian exporters need to accelerate efforts to move up in the value chain at the global level,” he said.

Finally, according to Mohanty, given the global uncertainties and volatility in capital flows, the resilience of the capital account needs to be enhanced by encouraging FDI.