C Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council, on Friday said India may contain the current account deficit for 2013-14 “well below $70 billion”, lower than 2011-12 level.

Current account deficit (CAD) widened from $78.2 billion in 2011-12 to $87.8 billion in 2012-13. From a comfortable 2.7 per cent of GDP in 2010-11, it increased to 4.8 per cent of the GDP in the last fiscal.

Rangarajan was delivering the 7{+t}{+h} J.G. Kumaramangalam Memorial Lecture organised by Coal India Ltd (CIL) as part of the company’s Foundation Day celebration in Kolkata.

Pointing out that capital flows into the country turned positive (FII inflows had turned negative by $13 billion during June-August) both in September and October, following US Fed’s decision to put off tapering; he said India’s trade account had also improved in the last couple of months.

Both in August and September, India’s exports showed double-digit growth, he said. There was a sharp decline in imports in the July-September quarter, contributed mainly by the decline in import of gold and silver. India’s trade deficit in the first half of this fiscal was $80 billion as compared to $92 billion in the previous year.

“If the present trend in export and import continues, the overall current account deficit may remain well below $70 billion. Capital flows will not only be adequate to cover the deficit but may even add to reserves,” he said allaying balance of payment concerns.

He, however, stressed that the CAD will be far above the comfort level of 2.5 per cent of GDP.

“Over the next few years, we need to take CAD to a more comfortable level of 2.5 per cent of GDP. The level of comfort is related to capital flow that can come in without any extra effort,” Rangarajan said.

Inflation, fiscal deficit

Rangarajan said that to achieve fiscal stability and return to 8-9 per cent growth, India had to tame inflation and clampdown on subsidies which now account for 2.6 per cent of the GDP. “We have had three years of high inflation…It came down to 4.8 per cent in April. However, there is some pick up in inflation since then. As of September, it has gone up to 6.5 per cent. Retail inflation still stands much higher at 9.2 per cent,” he said.

While inflation was primarily triggered by rise in prices of different categories of food items, it got generalised due to its prolonged persistence.

While anticipating that a good monsoon may increase agricultural output by five per cent, thereby addressing supply side concerns, Rangarajan said the “constant increase” in minimum support prices (MSP) was a structural factor behind food inflation.

Responding to queries on prospects of further interest rate hike by the RBI, he said: “It will depend on inflation trend.”

Talking about fiscal deficit, Rangarajan said the Government should prune subsidies in non-priority areas. If food security is important to the nation then subsidies in some other non-priority areas should be done away with, he added.

(This article was published on November 1, 2013)
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