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5.4% CAD Unsustainable, Says Subbarao

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Dismissing fears of the country heading towards a 1991-type of economic crisis, RBI Governor D Subbarao said on Saturday, 6 April, 2013 that India is "unlikely" to face a similar balance of payments situation even as the large current account deficit (CAD) is a matter of concern.

India's current account deficit is unsustainable at its present level of about 5 per cent of gross domestic product (GDP), Subbarao said, adding that a deficit of about 2.5 per cent of GDP would be sustainable.

"...it's unlikely that we will have a crisis of 1991-type simply because we have moved on. India is a much more liberalised economy, we integrated into the world, our exchange rate is largely market-determined, our financial markets are deeper", Subbarao said in an address, organised by the Federation of Karnataka Chambers of Commerce and Industry.

"We are unlikely to have a balance of payments crisis like the one we had in 1991", he noted, adding large current account deficit and fiscal deficit are no doubt concerns.

India's current account deficit hit a record $32.63 billion in the last three months of 2012, and stood at $71.7 billion for the April-December period, equivalent to 5.4 per cent of GDP.

CAD touched a record high of 6.7 per cent of the GDP in third quarter ended December 2012.

Meanwhile, Finance Minister P Chidambaram in New Delhi today said final CAD numbers for fiscal year would be more tolerable. Exports would have to be increased and unnecessary imports need to be curbed to bring down CAD, he added.

Subbarao noted India's economic reforms in 1991 were triggered by balance of payment crisis and thereafter for 15-17 years the "external sector" had remained robust, though it had problems on the fiscal and inflation fronts.

In the last three years, there have been strains on the external sector which had accentuated, he said.

The RBI Governor termed the estimated five per cent GDP growth of 2012-13 as "very disconcerting" and "uncomfortable".

The RBI would come out with growth estimates for 2013-14 in its annual policy on May 3.

Speaking on theme "India's macroeconomic challenges - Some Reserve Bank perspectives", he said the biggest concern by far is deceleration in investment because "today's investment is tomorrow's production capacity". "Today growth is moderating because investment is decelerating".

"One thing we all have to acknowledge, even though we don't like to, is today macroeconomic situation in India is a consequence of not just of global factors, but it's a consequence also of domestic factors. Indeed, I would say that the situation today is more a consequence of our domestic factors than global factors", Subbarao added.

The decision by new Bank of Japan Governor Haruhiko Kuroda to inject about $1.4 trillion into the Japanese economy in less than two years is seen possibly increasing capital flows into India, which should help finance the current account deficit, government officials told Reuters this week.

Shift In Food Habit In Rural Areas Fuelling Inflation

Impressive rise in rural incomes is fuelling food inflation as people's dietary habits are changing for the better and increasing consumption, RBI Governor D Subbarao said on Saturday.

Subbarao said here the poor segments of the population are seeing an increase in income, leading to shift in their dietary habits. People are shifting from cereals to protein and eating more of egg, meat, milk, vegetables, pulses and fruits and "that's causing food inflation".

"Now we have evidence. Over the last five years, rural wages have grown by 20 per cent every year" which RBI Governor termed as a "remarkable success story".

When the incomes of poor people rise, almost all of that goes for consumption, leading to demand pressures, he said, in an address on "India's macroeconomic challenges - Some Reserve Bank Perspectives" at a meeting, organised by the Federation of Karnataka Chambers of Commerce and Industry.

(Agencies)