In a major relief to the Government, the current account deficit could dip to as low as $41 billion (2.2 per cent of gross domestic product or GDP), the rating agency India Ratings said here on Tuesday. However, the agency has not revised its overall economic growth estimate of 4.9 per cent for 2013-14 while projecting growth of 5.6 per cent for 2014-15.

One of the two primary components of the balance of payments, CAD is the sum of the balance of trade (that is, revenue from exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers. The Government earlier estimated this deficit at $70 billion or 3.7 per cent of GDP then revised first to $60 billion, then $56 billion and finally below $50 billion.

Along with the Government, Indian rating and other economic research agencies estimate CAD to be lower because of gold import curb and stable oil prices. At the same time, recovery in the US and Europe will have favourable impact on exports. Hence, CAD is expected to go down against the estimate. This deficit was $88 billion during 2012-13, which is a record.

Economic Growth Prospects

The rating agency, which is the Indian arm of global major Fitch, expects agriculture to perform better in the current fiscal while industrial performance may go down while there is no change in services. Combining all, the growth estimate for the current fiscal remained unchanged. Talking about growth prospect for 2014-15, India Rating’s Devendra Kumar Pant said, “Although economic growth in FY15 is likely to be higher than that in FY14, the recovery will be gradual and unlike that witnessed after the global financial crisis of 2008. In other words a V-shaped recovery is unlikely.”

He also mentioned that until and unless big bang measures are taken, GDP growth in 2014-15 is estimated at 5.6 per cent. Pant’s colleague and co-analyst of this study, Sunil Sinha, felt that even after the elections if a different coalition takes over at Centre, there could not be dramatic alteration of policies and hence the growth estimated here is neutral to leadership change. He also mentioned that this is the base case scenario for growth and “it could be higher, if the Government loses its purse string.”

Fiscal Deficit

The central government’s fiscal deficit during the first eight months of the current fiscal FY14 touched 94 per cent of the budgeted target. However, there are indications that the government, like in 2012-13, will cut the capital and planned expenditure substantially to cap the fiscal deficit closer to the budgeted target for 2013- despite the forthcoming parliamentary elections in May 2014. The agency does not expect even the new government to splurge and therefore expects 2014-15 deficits to be 4.5 per cent.

Inflation

The agency expects the average inflation in 2014-15 to be lower than 2014-15. Although this will still be outside the RBI’s comfort zone of 5 per cent it will provide room for the RBI to cut policy rates by 50 basis points next year.

(This article was published on January 14, 2014)
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