Reining in CAD Monster: The hunt for $ 25 bn

The govt has its task cut out to to fund the current account deficit without touching the reserves

India’s current account deficit or CAD is much in news. And any discussion around a depreciating rupee brings us back to the rapidly rising CAD and how the govt plans to fund it.

 

For the uninitiated, Current account deficit occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world.

Rising demand for gold and crude and falling exports due to poor global economic situation has widened the current account deficit, triggering a real balance of payment crisis.

The current account deficit hit a record $87.8 billion or 4.8% of the gross domestic product (GDP) in 2012-13, up from $78.2 billion or 4.2% in the year before.

 

In a recent report, Sajjid Chinoy & Jahangir Aziz of JP Morgan have said that they expect the CAD to narrow this year to $ 80-85 bn but pegged the funding gap for CAD at $ 20-25 bn which in rupee terms would be around Rs 1,50,000 crore.

 

The duo, while doubting the govt’s ability to attract such flows to fund the gap also points out the govt’s dilemma in its note where it says,”That we are staring at a $20-25 billion hole in the BoP that would need to be financed either through other sources (which is challenging), aggressive RBI intervention – something the central bank (correctly) seems disinclined to do – or more policy tightening (something the government will be wary off).”

 

The note further goes on to point out that while CAD has been funded through stable flows of $ 50-55 bn over the last three years, about $20-25 bn came through volatile capital flows.

 

The trade deficit makes up an important part of the current account deficit (CAD), which had touched an all-time high of 4.8% in 2012-13.

 

All this points out that the govt will have to bring in measures that attract enough dollar inflows to finance the $ 25 bn gap without touching the reserves, as maintained by the finance minister, P Chidambaram in his repeated statements over the last few weeks.

 

This explains the rapid activity by the govt to ease FDI limits across the sectors, easing FDI policy for the much contentious mult-brand retail, asking public sector undertakings and financial institutions to raise funds abroad and possibility of higher import duty on luxury goods and consumer durables.

 

Here is a look at various measures that the govt is taking to rein in the current account deficit and fund the gap of $ 25 bn:

Govt eases FDI policy for multi-brand retail

The government on Thursday approved the much-awaited relaxation of the foreign direct investment (FDI) policy on multi-brand retail trading (MBRT), by easing the three main contentious riders on such money.
 

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Consumer durables likely to face higher import duty
The finance ministry has compiled a list of non-essential goods which could be subjected to higher customs duty, to reduce the country's import bill and bring down the current account deficit. The axe might fall on electronic goods and other consumer durables but the worry is that it might just be a drop in the ocean of India's current account woes.

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Nod for sovereign bond issue by public sector banks unlikely
The finance ministry may not go for a quasi sovereign bond offering abroad through public sector banks. Rather, it is likely to ask public sector undertakings and financial institutions to raise money abroad.

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July gold import estimate lower at 40 tonnes
Gold imports in July are estimated to be significantly lower at around 40 tonnes, compared with a spurt in imports seen in April and May. Imports in July 2012 were 65 tonnes, said a bullion analyst.

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Jump in coal imports led to 44% rise in forex outgo last quarter
Riding on the back of constrained domestic production, India’s coal imports jumped 33 per cent in the quarter ended June 30, leading to a foreign exchange (forex) outgo of close to $1.9 billion (Rs 11,485 crore on Thursday), up 44 per cent against $1.3 billion in the year-ago period.

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FDI cap in telecom removed

The Cabinet has approved doing away with the foreign direct investment (FDI) caps in the telecom sector, as well as for asset reconstruction companies.

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Govt may cut expenditure to control fiscal deficit

As in FY13, subsidies might overshoot the Budget Estimate (BE) and revenue collections could miss the target this financial year as well, early numbers show. 

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Is IMF loan a viable option?

The government is mulling options to tackle a bit difficult balance of payments (BoP) situation. A high current account deficit (CAD) looms large this financial year, besides dwindling capital flows, putting pressure on the rupee. 

 

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RBI tightens gold import norms to squeeze CAD

The Reserve Bank of India (RBI) on Monday streamlined its gold import policy to ensure at least 20 per cent of the yellow metal sourced from abroad was made available to the country’s gems & jewellery exporters. 

 

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