Current Account Deficit and Indian dilemma

The Indian economy after having seen many years of 8 percent plus growth is now settling down to a 5 percent growth. The collection of revenues by the government in the form of taxes and duties are expected to fall short of the target. Thus we may see the fiscal deficit of 4.8 percent for FY 13-14 breached. Also due to the rupees value faltering we may find the current account deficit going up because the import bill exceeding the target. RBI prepared a report on CAD for FY 13-14 and I am presenting the data as projected by them.

Indicators (billions) FY 12 FY 13 FY 14 (Estimate)
Merchandise exports 309.3 306.6 310-325
Merchandise imports 499.5 502.2 490-500
Trade Balance -189.8 -195.7 -175 to -190 bln

The net invisible are

Indicators ($ billion) FY 12 FY 13 FY 14 (Estimate)
Software and BPO 60.1 61.6 65.70
Private Remittances 63.5 64.3 67.72
Investment income -16.5 -22.4 -24
Total Net invisible 111.6 107.5 110-120

Current Account balance: Trade Balance + Net invisible

FY 12                      FY 13                      FY 14

-78.2 bln             -88.2 bln              -(60-70)

Our government is expecting the CAD to be around 60-70 bln dollars for the FY 14. This expectation is optimistic because

  1. Rupee is weakening and oil prices are moving up
  2. Europe is entering into deflation. Exports to Europe will be affected
  3. US is threatening with tapering QE3 and this will not be favorable to our exports.
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