FM says current account deficit will be 3-3.5 per cent of GDP this year
The government today said it did not want to put in place capital controls, as it wanted to use a surplus on the capital account as an insurance against the rising current account deficit.
Finance Minister Pranab Mukherjee told the Economic Editors’ Conference that inflows of $45-50 billion through the portfolio investment route were necessary, as they acted as “an insurance against the current account deficit”.
The minister said the current account deficit would be in the region of 3-3.5 per cent of the gross domestic product (GDP) this year. Some economists have predicted it could reach as much as 4 per cent of GDP.
The current account deficit more than trebled to $13.7 billion during the quarter ended June from $4.5 billion a year ago due to lower invisible surplus and larger trade deficit. At the same time, the capital account surplus rose to $17.5 billion, as against $4.6 billion in the corresponding period last year. It was mainly driven by short-term credit, external commercial borrowings, external assistance and banking capital.
So far this year, foreign institutional investors have pumped in $34.36 billion, as against $15.5 billion for January-October 2009, resulting in the rupee rising to a two-year high of 43.96 against the dollar on October 15. Global funds have been net buyers of stocks for 39 trading days, the longest run of inflows in more than five years since the 40-day period ended August 9, 2005, according to data compiled by Bloomberg.
The sharp appreciation of the rupee in recent weeks has prompted small exporters as well as large companies to seek government and Reserve Bank of India (RBI) intervention. “The current levels of capital inflows, which exceed financing requirements of our current account deficit, have put pressure on the rupee, resulting in its appreciation in the last few months. This has implications for our exports. We have faced a similar situation in the past and have overcome it without taking recourse to some of the more stringent policy measures that are by now well known to discerning analysts,” Mukherjee told the conference.
At the same time, he said the central bank was keeping tabs on the rupee movement and might intervene, if needed.
Though the minister painted a rosy picture of the economy, he did acknowledge inflation as a concern. He, however, seemed to be drawing comfort from inflation based on the wholesale price index and three consumer price indices declining to single-digit levels. He said with the steps taken by the government and RBI over the last few months, inflation would decline to around 6 per cent over the next few months, compared to 8.6 per cent in September.
The minister also said the ideal inflation rate would be 4-5 per cent, closer to RBI’s comfort level.
The finance minister stuck to the government’s GDP growth estimate of 8.5 per cent for the financial year but added that in the short term, the economy could expand at 9 per cent.
“In the short term, it is reasonable to expect the economy will go back to the robust growth path of around 9 per cent average that it was on before the global crisis slowed it down in 2008,” Mukherjee said.
Mukherjee also exuded confidence that partial restoration of tax cuts, compression in expenditure, and revenue from 3G auction and disinvestment would help the government in meeting its fiscal targets for the current year. He added that the exit from the fiscal stimulus injected to revive the economy would be gradual and sequenced, keeping in focus long-term fiscal sustainability concerns.
The government had projected its fiscal deficit to come down to 4.8 per cent of GDP in 2011-12 and 4.1 per cent in 2012-13. It is expecting to close the year with a fiscal deficit of 5.5 per cent, compared with a high fiscal deficit of 6.7 per cent in 2009-10.
The deficit had increased on account of excess government spending to help the economy deal with the global financial meltdown.
