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Bolstered by trade deficit of June and July, Finance Minister P Chidambaram today pegged India's current account deficit (CAD) at a three-year low of 3.7 per cent of the Gross Domestic Product (GDP) in 2013-14. CAD had touched the record 4.8 per cent in the last financial year. His plan of action included curbing imports of non-essential goods to check CAD and raise dollars through quasi-sovereign bonds and external commercial borrowings to fund CAD.
“If the CAD is contained at $70 billion, it will amount to 3.7 per cent of the GDP”, Chidambaram said in a statement in the Lok Sabha. In absolute terms, CAD stood at $88.2 billion in 2012-13.
The GDP is projected to be around $1.89 trillion this financial year (assuming rupee at 60 against a dollar). At this rate, $70 billion does come to 3.69 per cent of GDP.
However, if the GDP falls, CAD in percentage terms would go up. The current estimate of CAD has been made on the basis of projections for exports and imports and trade deficit this year.
After touching $17.78 billion in April and $20.14 billion in May, trade deficit fell drastically to $12.25 billion in June and $12.27 billion in July. Even then, trade deficit widened to $62.45 billion in the first four months of the current financial year against $59.7 billion in the corresponding period of the previous year.
The finance minister said the government would reduce imports of gold, silver, oil and non-essential goods to narrow CAD. Besides,permit public sector financial institutions will be asked to go for quasi sovereign bond, while oil companies will be asked to raise money abroad for meeting long-term infrastructure needs to fund CAD. Also, non-resident deposit schemes will be liberalised to increase dollar inflows into the country to finance CAD.
Those in the know said Power Finance Corporation, IIFCL and Indian Railway Finance Corporation are the prime candidates for raising quasi sovereign bond.
“Notifications in respect of tariff rates will be laid before Parliament in the usual course,” he said, and admitted there was need to do more to contain CAD, reduce volatility in the currency market and to stabilise the rupee.
Chidambaram said the measures were being taken after extensive consultations with the ministries of Commerce and Industry, Petroleum and Natural Gas and Reserve Bank of India.
In 2011-12 the government had to draw forex reserves of $12.8 billion to finance CAD.
“Last year we had a larger CAD at $88.2 billion. Nevertheless, we were able to fully and safely finance the CAD, and do even better. We added USD 3.8 billion to the reserves,” he said, adding there could be small accretion to foreign exchange reserves this year.
Rupee, has depreciated by over 12 per cent against the dollar since the beginning of this financial year, today closed at XXX. It had hit an all time closing low of 61.30 against a dollar on last Wednesday. Depreciation of the rupee also means lower GDP in terms of dollar, which would magnify any given absolute number of CAD
