Twin deficits still remain a cause for concern: Nomura

Research firm Nomura on Thursday said the couple of recent developments suggested country’s twin deficits — fiscal and current account — are worsening at the margin.

It spoke of the tepid response to the 2G telecom spectrum auction concluded yesterday, which was expected to fetch the government Rs 40,000 crore, could manage to earn only about Rs 9,400 crore.

The government’s revised fiscal deficit target also looks difficult to achieve, Nomura further said. The government had recently revised its fiscal deficit target to 5.3 per cent from the budgeted 5.1 per cent.

Secondly, it said the October trade deficit widened to an all-time high of $ 21billion due to weak exports, a seasonal rise in gold imports, higher oil prices and improving non-oil/non-gold imports.

The firm believes this is due to the ongoing import substitution, since it helps to explain the disconnect between weak domestic production and rising imports and it suggests there are upside risks to current account deficit forecast which is 3.8 per cent of the GDP in this financial year. It might also reach the level of the last financial year when it was recorded at the level of 4.2 per cent of the GDP, it said in a note.

The negative news on the twin deficits has largely offset the positive news on inflation, Nomura said.

It expects the Reserve Bank of India to cut the repo rate by 50 basis points in the first half of the next year on the back of falling core inflation but the central bank, it said, won’t aggressively cut the rates.

As an impact of all these factors, Nomura said, we expect India’s growth recovery to remain shallow, as the worsening of the twin deficit suggests the macro-economic imbalances have yet to correct.