Despite the jubilation within the Government over current account deficit (CAD) narrowing down in second quarter of FY14, HSBC has cautioned in a report that it may widen during the second half of the current fiscal. Even the FDI inflows have declined by about 38 per cent in September 2013 over the corresponding period according to the Commerce Ministry. This indicates that though investor friendly measures have been announced by the Government, it may take some time till the economy is completely out of the woods
India's CAD likely to widen in second half of FY14: HSBC
India's current account deficit which narrowed in the second quarter of this fiscal, however, is likely to widen during the second half of FY 2013-14 as seasonal demand bring in more imports, an HSBC report says. According to the global brokerage firm, the deficit is likely to widen again as imports get a lift from seasonal demand and a gradual recovery in domestic demand.
Decline in gold imports and turnaround in exports helped narrow India's current account gap to $ 5.2 billion, or 1.2 per cent of GDP, in the July-September quarter of this fiscal. The current account deficit (CAD), the difference between outflow and inflow of foreign exchange, was at $ 21 billion, or 5 per cent of the GDP, in the second quarter of last fiscal.
“Despite the narrowing of the deficit in recent quarters and successful measures to attract capital inflows, policy makers have to continue their efforts to reduce India's vulnerability to external spillovers ahead of Fed tapering,” HSBC Chief Economist for India and ASEAN leif Eskesen said. The country's CAD is likely to narrow notably from last year, aided also by firming exports, however, policy makers should continue to reduce vulnerabilities ahead of Fed tapering, the report said.
The government has taken several steps, including hike in gold import duty to 10 per cent and restrictions on import of gold bars and medallions, to restrict CAD. It has also taken measures to boost exports. “While deficit has narrowed and steps to improve its financing have been successful, policy makers should not rest their laurels and continue efforts to reduce vulnerabilities ahead of Fed tapering,” it said.
lower CAD during the second quarter was primarily on account of a fall in the trade deficit as merchandise exports picked up and imports moderated, particularly gold imports. Both the Government and RBI are expecting the CAD to be below $56 billion in the current fiscal compared to the record high of $ 88.2 billion, or 4.8 per cent of the GDP last fiscal.
FDI inflow declines 38% to $2.91 bn in September
While the Government is trying to attract more foreign direct investments (FDI), the latest data issued by the Department of Industrial Policy and Promotion (DIPP) states that the FDI flows in September slid sharply by 38 per cent. As per DIPP, FDI inflows shrank to $2.91 billion in September this year as against $ 4.67 billion in the same month last year.
During the April-September period of 2013-14 fiscal, FDI has thus dipped by 11 per cent to $11.37 billion, from$12.84 billion in the first half of 2012-13, DIPP said. FDIs fell in sectors like services, telecom and metallurgical industries have lowered the inflows. From April-September this fiscal, FDI in services, telecom and metallurgical industries declined to $ 1.32 billion, $32 million and $ 240 million respectively. In the first six months of last fiscal, services had attracted $3.04 billion, telecom - $43 million and Metallurgical industries - $ 685 million.
However, according to various estimates, the recent steps announced by the government are expected to improve the investment climate in the country and push up FDI inflows. It has relaxed FDI policy in 12 sectors, including telecom, tea and petroleum & natural gas. FDI inflows in 2012-13 aggregated to $22.42 billion, a decline from $ 36.50 billion in 2011-12. India is projected to require around $ 1 trillion between 2012-13 and 2016-17, the 12th Five Year Plan period, to fund infrastructure growth covering sectors such as ports, airports and highways.