FM draws comfort from lower CAD, higher PMI

Dec 03 2013, 05:28 IST
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Summary* At 1.2% of GDP, the deficit in Q2 has come down to $5.15 bn

AMID the gloom that continues to pervade the economy, finance minister P Chidambaram on Monday sought to take heart from some data points that looked positive, especially the sharp decline in the current account deficit (CAD) to $5.15 billion or 1.2% of GDP in the September quarter.

Government managers said strong exports, a deceleration in imports and likely status-quoist flows of invisibles might lead to the CAD in the third and fourth quarters of this fiscal to be not much higher than the Q2 level. With the first-half CAD, as per RBI data released on Monday, at $26.9 billion, deficit for the full year would likely be contained below $45 billion, they say.

CAD stood at $88.2 billion or 4.8% of GDP in FY13. The deficit was $22 billion or 4.9% of GDP in Q1 FY14.

The concern, however, was that despite the remarkably low CAD, there was a $10.7-billion depletion of forex reserves in the first half of this fiscal. The draw-down was due to aggressive FII selling of debt, higher levels of repayment of overseas borrowings by banks and a sharp decline in trade credits and advances. Obviously, the government will have to be aggressive about the planned quasi-sovereign bond issues to keep the net capital flows robust in H1. Chidambaram recently said that the country would be prepared to deal with any impact of the US Federal Reserves gradual stimulus withdrawal.

The minister, who a few days ago said CAD for FY14 could be better than the $56 billion forecast by the RBI, however, chose to be wary after the release of Q2 data.

Chidambaram said that clearly, the balance of payment position has improved significantly on quarter-on-quarter and half year-on-half year. On the current account, the net deficit has narrowed from $21 billion in the second quarter of last fiscal to $5.2 billion in the second quarter of this year. These are good signs. We will contain CAD at the targeted level despite some concerns expressed in some quarters, he said.

The Q1 trade deficit was $33 billion as compared to $50.5 billion in Q2 and $45.6 billion in Q4 last fiscal. This trend is likely to be sustained in the short-term, trade experts say. (Exports rose 13.47% to $27.3 billion in October, the highest growth rate in two years and imports dipped by 14.5% $37.8 billion, leaving a trade deficit of $10.56 billion, as compared to $20.2 billion in October

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