One of the major worries on India’s macroeconomic front has been the widening of the current account deficit (CAD) to 4.8 per cent of GDP in 2012-13, a level much higher than the estimated sustainable level of 2.5 per cent. A related worry has been our ability in financing the CAD over the long run. Bringing down the CAD to $70 billion (3.7 per cent of GDP) for 2013-14 as targeted by the Finance Minister seems achievable given the marked improvements in recent trade data. Let us examine (a) whether the math around the current account balance can add up to the set target, and (b) if our capital flows can finance this deficit.

The story of exports contraction in the last fiscal year has been replaced by revival in exports in the current fiscal, especially for the second quarter when exports recorded double-digit growth aided by improvement in global demand and rupee depreciation. For the first half of the current year, exports grew at about 5 per cent to $152 billion.

The second half of the fiscal year is also expected to see strong exports as sectors such as textiles and garments, agriculture products and leather goods are likely to display healthy growth similar to the last three months.

We expect IT to see an increase in growth from 10 per cent and pharma too is showing buoyancy. If the current trend continues, our exports for 2013-14 can be anywhere between $310 billion and $325 billion, the former number being the projected exports by the Prime Minister’s Economic Advisory Council (PMEAC) while the latter number is the export target set by the government. Our exports in the second half of the last fiscal were about $155.5 billion.

Thus, reaching PMEAC’s estimates is possible with a mere 1.6 per cent growth over the next six months but to reach the target set by the government, our exports need to grow at about 11.25 per cent, which perhaps is also achievable given the recent trends.

Gold and invisibles

There has been a decline in imports by 1.8 per cent year-on-year to $232 billion in the first half of this year, which has been possible due to concerted action by the government and RBI on curtailing gold imports. According to the Gems and Jewellery Export Promotion Council, imports of gold bars and gold jewellery during April-August 2013 were down to $2.1 billion and $193.5 million as against $4.9 billion and $3.3 billion, respectively, in April-August 2012.

Though a surge in gold imports is expected in the third quarter due to the festive and wedding season as is typical every year, gold imports for the whole fiscal year should be way below that of 2012-13 ($53.7 billion) and this should help in moderating overall imports growth. To cut the massive oil import bill, the government is also devising strategies for fuel conservation and import substitution.

Our invisibles account too is expected to provide a healthy cushion; Nasscom estimates suggest that export revenues of software companies would grow by 12-14 per cent in FY14. Remittances too are expected to be high this fiscal due to the weakening rupee. The World Bank, in its recent report, has indicated that India will be the largest recipient of remittances in 2013, estimated at $71 billion.

Adding up the expected exports, imports and invisibles, the CAD should fall in the range of $60-70 billion for 2013-14. Now the question is, can this be easily financed through capital flows?

Risk persists

The concerns related to a mass exodus of FIIs from the Indian market as seen during June-August 2013 seem to have eased with the delay in QE tapering, but the risk still persists as US stimulus would be withdrawn eventually. However, in view of the steps taken since July, we look much stronger in our desire and ability to counter risk perception on this front and a gradual QE tapering should not produce the same effect the announcement did last month. Our trade deficit and CAD are significantly improved and improving.

FDI, on the other hand, has been stable, recording 25 per cent growth in the first five months. More FDI should flow in the coming months as the effects of recent policy moves take shape. NRI deposits have seen about 9.5 per cent growth till August 2013 due to the rupee depreciation and an effort by India to enable leverage which, with a hike in interest rates on non-resident deposits by several banks, has brought in about $7 billion and should see $12-15 billion come in.

Thus, financing of the CAD should not be a difficult task if CAD is contained in the expected range of $60-70 billion. In fact, the Planning Commission recently estimated CAD to be around $40-45 billion for 2013-14, i.e. about 2.5 per cent of GDP.

Need to diversify

However, to ensure that our current account balance is brought to sustainable levels in the coming years, there is a need to raise export competitiveness of our sectors and further diversify our exports basket. Economising on oil imports is absolutely essential; this can be achieved by giving a push to domestic oil and gas exploration, particularly encouraging new avenues of energy such as shale gas, and giving a push to renewable energy.

Further, augmenting domestic capacities through channelled policy reforms can also lead to import substitution with respect to large imports like capital goods, electronics, and so on. Essentially, without a manufacturing focus, we will not get our CAD into balance as this is needed for both enhancing exports and substituting imports.

Finally, we cannot ignore the importance of growth as being central to our public policy and projecting this to the investor community at large. We also need to communicate the good news. This is critical for bringing investments back which will ultimately help bring the CAD to acceptable levels.

(The author is President of the Federation of Indian Chambers of Commerce and Industry.)

Related Topics
comment COMMENT NOW