Finance Minister P. Chidambaram’s statements on economic matters are rarely contradicted by anyone in the Government. However, this does not hold true for financing the current account deficit (CAD), especially after the Prime Minister’s Economic Advisory Council’s projections came out last week.
CAD generally means what you earn and what you pay in dollars. Earnings or fund flows consist of those from exports, besides foreign direct investment, foreign institutional investment (FII), external commercial borrowings and non-resident deposits. Payments mainly include the import bill, besides FII outflow and repayment of overseas loan.
The Prime Minister’s Economic Advisory Council (PMEAC), in it ‘Economic Outlook 2013-14’, has mentioned: “Overall, in 2013-14, the net balance on capital flows is placed at $61 billion, which would fall short of the projected CAD, requiring a draw down of $9 billion from the reserves — roughly about what has already happened to date.”
This issue is significant at a time when forex reserves are down to a three-year low of $274.8 billion.
Now, compare this with what Chidambaram said on August 12: “We expect that the CAD will be contained at $70 billion, while the inflows will increase to a level that will be sufficient to finance the CAD.” Why are the two views different?
The PMEAC expects net capital flows at $61.4 billion, while the Finance Minister hopes to get $75 billion as net dollar flow.
At the end of the financial year, either of these two calculations will prove right, fully or partially.
However, the variance has given an opportunity to rating agencies and economic pundits to once again speculate about India’s CAD situation, which may prevent these agencies from making a favourable statement about the nation’s economy.