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Even as gold prices plummeted and oil rates declined to give comfort to policymakers on the current account deficit (CAD) front, the International Monetary Fund (IMF) on Tuesday projected India's CAD at 4.9 per cent of the GDP in 2013, only a tad lower than 5.1 per cent in the previous year.
In its World Economic Outlook, the IMF projected India's CAD to come down to 4.6 per cent in 2014.
Actual CAD for 2012 and projected ones for 2013 and 2014 are much above the desired level. Recently, the Prime Minister’s Economic Advisory Council Chairman C Rangarajan said the country had to bring down its CAD to about 2.5 per cent to achieve and sustain a higher growth rate.
Gold and oil were the two main culprits for the rise in India's CAD. India officially measures CAD in a financial year. Its CAD was as high as 6.7 per cent of the gross domestic product (GDP) in the third quarter of FY13. CAD during April-December of FY13 was 5.4 per cent of the GDP.
Finance Minister P Chidambaram had recently said CAD was a bigger worry than fiscal deficit.
Even as the wholesale price index (WPI)-based inflation came down to a 40-month low of 5.96 per cent in March, India may not witness relief on the consumer price index (CPI)-based inflation, if IMF projections are to be believed.
IMF projected the CPI inflation to be 10.8 per cent in 2013, up from 9.3 per cent in 2012. For 2014, IMF pegged this inflation to be 10.7 per cent.
Food articles, which have over 45 per cent weight in the index, were blamed by the IMF for high CPI inflation.
Although, the IMF projected inflationary pressures to remain subdued in large parts of the world due to economic slow down and lower food and energy prices, it said India’s inflation would go up due to higher food prices.
“Spurred by food prices in some cases (India), and (inflation) could surprise on the upside,” the report said.
IMF projected India’s GDP to grow by 5.7 per cent in 2013 from four per cent in 2012. The IMF projections were 0.2 percentage points lower than its earlier estimate for 2013. For 2014, the Fund scaled down its projections for India's economic growth by two percentage points to 6.2 per cent.
IMF uses a different methodology of GDP estimation than the official one in India. IMF includes indirect taxes in its estimations, which in technical jargon is called GDP at market prices.
According to IMF, external demand, solid consumption, a better monsoon season, and policy improvements could lift activity in India.
According to the World Economic Outlook, improved external demand, and recent pro-growth measures adopted by the government will stimulate India’s economic growth. It said that structural challenges would result in low output and high inflation in the short-run.
The report further said India along with West Asian oil importers with high energy subsidy spending, and several emerging European economies are likely to face significant fiscal challenges.
The need for fiscal consolidation is more urgent in economies where fiscal deficits are large, such as India and Pakistan, or where there are structural impediments to growth, such as Egypt, India, Jordan, and Pakistan, the report added.
