Finance minister P Chidambaram on Monday said the government will be able limit in the current account deficit (CAD) — the difference between annual foreign exchange inflows and outflows-— at 3.7% of the GDP in 2013-14, from the previous year's record 4.8% of GDP amid signs that recovery in India's economy may be a slower than expected.
“If CAD is contained at $70 billion, it will amount to 3.7% of GDP,” Chidambaram told the Lok Sabha on Monday in a statement.
Chidambaram said import duties on gold, silver, oil and non-essential goods may go up as he laid out the broad contours of the government's strategy to contain the CAD and halt the slide of the rupee that has fallen 15% since May.
Gold imports, in wake of the curbs that the government has imposed can bring down the CAD, but financing the CAD this year will be the key challenge, as not only are there risks from lower portfolio inflows, but debt inflows such as short-term trade credit also suggest caution.
"This year too, investors and analysts have raised concerns about the CAD. Their concerns are reflected in the pressure on the exchange rate," Chidambaram said, saying despite recent RBI measures "we have to do more to contain the CAD, to reduce volatility in the currency market and to stabilise the rupee."
Analysts say the record CAD may restrict the RBI's elbow room to prop up the rupee by dipping into India's $285 billion of foreign exchange reserves, enough to cover imports for seven months.
Foreign investors continued to pull out from emerging markets including India, after the US Federal Reserve signalled a timeline to wind down its monetary stimulus programme by mid-2014.
“While the government’s estimate of a smaller current account deficit is in line with our view, the real issue is financing the deficit. Weak domestic growth prospects suggest that portfolio equity inflows and overseas borrowings will be much lower this year,” said Sonal Varma, economist at broking and research firm Nomura.