Current account deficit going wayward!

Mon, 27 Feb Pre-Open

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Time and again, we have talked about the Indian government not likely to meet its budgeted fiscal deficit target. At worse, it may miss the target by a huge margin. The government has already run up a fiscal deficit of 92.3% of its budget estimates in 9mFY12. And the story does not end here. If we look at the current account, the status is more than pathetic. As per the estimation done by Economic Advisory Council to the Prime Minister of India (PMEAC), the country is going to witness current account deficit (CAD) of 3.6% of Gross Domestic Products (GDP). Even at the time of the 1991 crisis, performance was better than this, at 3% of GDP.

Worst of all, there is not much expectation on improvements in the coming fiscal year 2012-13 as well. As per the projection given by PMEAC, CAD is expected to come down to around 3% of GDP. Definitely, not a healthy sign. And looking at the governments's track record of missing most of the budget targets, the actual performance may be worse than that.

Well, why are we facing such a grim situation? On fiscal deficit front, slower revenues collections and increasing government expenditures due to subsidies and several welfare schemes are the main culprit. However, on the CAD front, despite India having a trade surplus in services, trade deficit is widening by the day. The major culprit is our high dependence on crude oil. With the rise in crude oil prices, import bills have been high during the current fiscal year 2011-12. In addition to that, performance on the exports front has also not been good on account of the weak global economic environment. Trade deficit contributes a major portion of our current account deficit.

What is the road to recovery? PMEAC advises the government to take many concrete steps to correct the sorry figures of both fiscal and current account deficits. It suggests many fiscal consolidation measures such as cutting down the oil and fertilizers subsidies and decontrolling diesel prices in a phased manner. It also emphasizes on improving the tax-GDP ratio. On the CAD front, PMEAC advises the government to improve the business environment in the country, especially in terms of policy reforms. That will also facilitate foreign capital inflows.

Would the upcoming budget pay heed to these suggestions? Would we finally see some action on the reforms front? One will have to wait and see.