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Even as gold prices plummeted and oil rates declined to give comfort to policy makers on the current account deficit front, the International Monetary Fund (IMF) today projected India's CAD at 4.9% of GDP in 2013, only a tad lower than 5.1% in the previous year.
In its World Economic Outlook (WEO), IMF projected India's CAD to come down to 4.6% in 2014.
Actual CAD for 2012 and projected ones for 2013 and 2014 are much above the desired level. Recently, Prime Minister's Economic Advisory Council (PEMAC) chairman C Rangarajan said the country has to bring down its current account deficit (CAD) to around 2.5% to achieve and sustain higher growth rate.
Gold along with oil were the two main culprit for increasing India's CAD. India officially measures CAD in a financial year. Its CAD was as high as 6.7% of GDP in the third quarter of 2012-13. India’s CAD in during April-December of 2012-13 was 5.4% of the GDP.
CAD was stated to be bigger worry for India than fiscal deficit by Finance Minister P Chidambaram.
Even as the wholesale price index-based inflation came down to a 40-month low of 5.96% 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% 2013, up from 9.3% in 2012. For,2014, IMF pegged this inflation to be 10.7%.
Food articles which have over 45% weight in the index were blamed by IMF for high CPI inflation.
Though IMF projected inflationary pressures to remain subdued in large parts of the world due to economic slow down, lower food and energy prices, it stated that in India, the inflation pressure is projected to be fairly high because of 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% in 2013 from four% 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%.
Here it should be noted that IMF uses different methodology of GDP estimation than official one in India. IMF includes indirect taxes in its estimations, which in technical jargon is called GDP at market prices.
IMF said external demand, solid consumption, a better monsoon season, and policy improvements are expected to lift activity in India.
The WEO said that improved external demand, and recent pro-growth measures adopted by the government will stimulate India’s economic growth.
It said that structural challenges are likely to result in low output and high inflation in the short run.
The report further said that India along with west Asian oil importers with high energy subsidy spending, 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 like India and Pakistan, or where there are structural impediments to growth, like Egypt, India, Jordan, and Pakistan, it added.
