Twin deficits still remain a cause of concern : Nomura

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

It said that the tepid response to 2G auction concluded yesterday which had expected to fetch government Rs 40,000 crore could manage to earn only about Rs 9,400 crore.

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

Secondly it said that 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 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% of GDP in this fiscal. It may also reach the level of last fiscal when it was recorded at the level of 4.2% 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 (RBI) to cut repo rate by 50 basis points in the first half of the next year on the back of falling core inflation but RBI won’t aggressively cut the rates it said.

 

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