Current account deficit foremost current challenge: P Chidambaram

Finance Minister P. Chidambaram on Monday said that the Current account deficit (CAD) was the foremost challenge faced by the country which caused concern among both investors and analysts.

Chidambaram announced the measures to contain the CAD in Parliament, which included allowing state finance companies to sell quasi-sovereign bonds to fund long-term infrastructure.

The rupee weakened towards a record low on Monday after Chidambaram unveiled much anticipated proposals to narrow the current account deficit that were seen lacking crucial details.

Earlier in the day, Chidambaram, in a statement in Parliament, vowed to contain the current account deficit at 70 billion USD for the fiscal year ending in March, or an estimated 3.7 percent of gross domestic product (GDP).

"There is concern both among investors and analysts that the foremost challenge this year would be the current account deficit. We think that the concern needs to be addressed upfront," Chidambaram said.

"In 2011-12, while financing the CAD, we had to draw upon reserves to the extent of 12.8 billion USD. Last year, we had a larger CAD at 88.2 billion USD. Nevertheless, we were able to fully and safely finance the CAD, and do even better. We added $3.8 billion to the reserves," he added.

Chidambaram told parliament that India would seek to reduce imports of gold, silver and "non-essential" imports, while also curbing demand for oil.

"Four billion on gold and 1.5 billion on oil, we can save 5.5 billion on the business as usual CAD and contain it at 70 billion US dollars," said Chidambaram.

Chidambaram further said that it was expected that the inflows would increase further than the current account deficit.

"The inflows will be more than sufficient to finance the CAD. It will be contained at 70 billion and we expect inflows to rise to 75 billion. If CAD is contained at 70 billion it will amount to 3.7 percent of the GDP as against last years 4.8 percent of GDP," he said.

The finance minister also proposed to raise funds abroad, allowing public sector financial firms to sell debt to finance long-term infrastructure projects, raising money via deposits targeted at Indian citizens abroad, and liberalizing guidelines for external commercial borrowings.

Chidambaram said the recent volatility in the currency markets was largely due to the growing concerns over the CAD.

"The RBI has taken a number of measures to increase the interest rate at the short end and this has contained the depreciation of the rupee to some extent. However, we believe that we have to do more to contain the CAD, to reduce volatility in the currency market and to stabilize the rupee," he added.

Separately, Chidambaram also said there might be more space for oil imports from Iran.

Recently on August 08, the Reserve Bank of India (RBI) announced new measures to drain cash from the financial system in a bid to address volatility in currency markets, following up on a slew of steps announced last month.