The policy of maintaining a very low current account deficit (CAD) is to be relooked, according to the Reserve Bank of India (RBI). This is due to the fact that a higher level of CAD can now be financed through capital inflows since a large part of comprise foreign direct and portfolio investment and not debt.
The central bank said: "The conservative approach to sustainable level CAD needs to be reassessed in the light of the changes brought about in the 1990s in the composition of the capital flows in favour of non-debt creating liabilities."
The debt-creating capital flows accounted for almost 100 per cent of the net flows to the country in 1990-91. The composition has shifted significantly in favour of the non-debt creating flows, accounting for more than 45 per cent of the net flow in 2000-01.
The apex bank, however, opined that the higher sustainable level of CAD may be feasible only if it is concurrently possible to augment the absorptive capacity and the export performance of the economy.
The RBI said the capital flows have been playing a significant role in India's growth. It however feels: "Growth-augmenting the role of foreign capital, however, seems to have been constrained by the low levels of actual and planned absorption of foreign capital in India."
The RBI has said that a minimum two fold increase in the net capital flows from its present level would be necessary to meet the 10th plan's projection of a current account deficit of 2.8 per cent of gross domestic product. During the last decade (1992-2001), CAD as a percentage of GDP, however, was about 1 per cent.
