'CAD likely to fall to 2.1% in FY15; to be fully financed'

India's current account deficit (CAD) is likely to fall to 2.1 per cent of the GDP in 2014-15 and will be fully financed in the current year, the government said today.
CAD, which is excess of foreign exchange over inflows, declined sharply from a record high of $88.2 billion (4.7 per cent of gross domestic product) in 2012-13 to $32.4 billion (1.7 per cent of GDP) in 2013-14.
"With close monitoring and policies calibrated to emerging contexts upfront, it is likely that the CAD may be limited to around $45 billion (2.1 per cent of GDP) in 2014-15, which is likely to be fully financed by stable sources of capital flows," said the Economic Survey for 2013-14 tabled by Finance Minister Arun Jaitley in Lok Sabha today.
"After staying at perilously unsustainable levels of well over 4 per cent of GDP in 2011-12 and 2012-13, the improvement in BoP (Balance of Payments) position is a welcome relief, and there is need to sustain the position going forward."
Improvement in BoP in latter half of 2013-14 was indeed swift and owed to exceptional measures like restrictions on non-essential imports, limited period incentives for certain varieties of capital flows and impact of overall economic slowdown on imports, it said.
Hiking customs duty in gold and silver to a peak to 10 per cent, improving capital outflows through quasi-sovereign bonds and liberalisation of external commercial borrowings also helped control rising CAD.
The survey said a longer-term outlook has already been outlined in terms of the fiscal consolidation roadmap leading to a fiscal deficit of 3 per cent of GDP in 2016-17.
"Despite the global and domestic challenges, the economy achieved its targeted fiscal consolidation 2013-14. Nevertheless, this was achieved by cutting expenditure which is unsustainable for an economy."
India's fiscal deficit remained at 4.5 per cent of the GDP in 2013-14.
However, sustaining the robust outcome in the medium term is a challenge as some of the restrictions need to be gradually withdrawn.
It said there is need to adjust to not merely the asset purchase taper by the US Fed but also to the eventual exit from the accommodate monetary policy stance by advanced economies.
A high CAD puts pressure on the rupee, which in turn makes imports expensive and fuels inflation.