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Is 3% deficit the new normal?
Mon, 14 May Pre-Open

A record rise in imports, mainly on a continuingly weak rupee and higher gold purchases saw India's trade deficit reach US$ 185 bn last fiscal. This was despite exports also overshooting their target by a few billion dollars to reach US$ 303 bn. These movements caused the current account deficit (CAD) or the difference between exports and imports after considering cash remittances and payments to touch a high level of 4.3% of GDP in FY12. This was nearly double the level of 2.7% seen for FY11.

So is this expected to be the new normal going forward? Or will India try hard to fix this unfavourable position. Planning Commission deputy chairman Montek Singh Ahluwalia believes so. He is confident that the country can finance a CAD of 3%. Despite seeing a GDP growth of only 6.9% in FY12, this growth blew most other countries out of the water. India is still one of the fastest growing economies in the world with tremendous potential. But, outside investors need to believe this as well. According to Mr Aluwalia, if India's story is well conveyed and it can attract enough Foreign Direct Investment (FDI) and portfolio investment, financing a 3% CAD will not be very difficult.

Agreed, a 3% CAD is more sustainable than what was seen at the end of FY12. But, can India address its growth challenge? A number of economic indicators are showing unfavorable signs. Policy paralysis, persistent inflation, and corruption issues still haven't been addressed. Power reforms and fuel price deregulation are necessary. Otherwise India will never see energy efficiency being pursued, as it is in the West. FDI in aviation, multi brand retail etc needs to come through so that India gets a resource boost. Believing in the underlying strength of the economy, Mr. Ahluwalia believes that the economy can grow at 9% or more even without any immediate reforms. The question is do investors agree with him?

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