RBI raises concerns on widening CAD

Current level far above the level sustainable for India

The Reserve Bank of India (RBI) raised concerns on the widening Current Account Deficit (CAD) of India as the central bank feels that the current level of CAD is far above the the level sustainable for India.

“As per estimates, at a nominal growth rate of about 13%, the sustainable current account to GDP ratio is 2.3%. Reserve Bank’s own research shows that economy can sustain CAD of about 2.5% of GDP under a scenario of slower growth,” said Deepak Mohanty, executive director, RBI in his speech at an event in Bhubaneswar.

CAD as proportion of GDP was marginally up to 3.9% for Q1 of FY13 from 3.8% for Q1 of 2011-12. Last week, Prime Minister's Economic Adviser Council Chairman C Rangarajan also had said that there is a need to bring down the current account deficit to 2.5% over a period of time.

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

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.

According to Mohanty there is a need to reduce vulnerability emanating 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 also expressed his view that current policies towards further diversification of India’s export basket, both destination and products, needs 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 capital account needs to be further enhanced by encouraging FDI inflows.