New Delhi, Aug. 12: The Centre hopes to cap current account deficit this year at $70 billion and to bridge this yawning gap between forex earnings and spending, it will raise around $11 billion more through a mix of quasi-sovereign bonds of state–run infrastructure finance firms, easier foreign borrowing norms and simpler rules governing NRI deposits with local banks.
The government will also raise duties on luxury imports and may take fresh measures to stall gold imports.
Finance minister P. Chidambaram said, “I am committing to contain the current account deficit at $70 billion this year, or 3.7 per cent of the GDP, through these measures.”
This is the first time that the UPA government has set a numerical target for a runaway deficit that careened out of control last year when it surged to $88.2 billion.
The 20 per cent reduction in the CAD is the first serious attempt to put the economy back in order, prop up the battered rupee by re-igniting dollar flows and restoring overseas investors’ confidence in the India story that has looked pretty ragged this year.
Chidambaram said three state-run infrastructure finance companies — Indian Railway Finance Corp, Power Finance Corp and India Infrastructure Finance Co Ltd — would raise $4 billion by floating tax-free quasi-sovereign bonds or commercial bonds guaranteed by the Indian government. The government would allow foreign sovereign wealth funds such as Abu Dhabi Investment Fund to invest in up to 30 per cent of the bond offerings.
Another $2 billion is expected by making it easier for arms of multinationals to raise dollars or other hard currencies from their parents abroad and by giving aircraft repair and maintenance operations (MROs) such as Boeing’s proposed MRO in India the infrastructure status that airports have, which would allow them to access cheaper foreign loans easily.
Three state-run oil companies — Indian Oil, BPCL and HPCL — are expected to raise some $3.75 billion through foreign loans to finance their operations, while easing of trade finance rules is expected to allow firms to bring in at least a quarter of a billion dollars.
The minister also said that Indian banks that raise dollar deposits from NRIs could bring back the money (in incremental deposits or fresh deposits) and not be forced to park part of it compulsorily with the RBI as cash reserve ratio and statutory liquidity ratio or be forced to on-lend it to priority sectors such as small businesses and farms. This measure should raise at least $1 billion.
“We have worked out these figures with the RBI, banks, PSUs and oil companies and we feel they are on the conservative side,” said top finance ministry officials.
Chidambaram had made a statement earlier in the day in which he promised to cap the current account deficit without giving any specifics. After the announcement, the rupee fell to 61.30. The news meet was called after the fall in currency value.
Normal foreign exchange inflows into India would have been about $64 billion this year, including about $22 billion in foreign direct investment and inflows from foreign institutional investors, banking capital and foreign loans. However, the measures announced today will now take forex inflows to $75 billion. “If CAD could be contained at $70 billion … we will be able to actually increase our forex reserves by $5 billion,” Chidambaram said.
The minister said CAD was being “contained” by a series of import compression measures, which included containing gold import to 850 tonnes this year against 950 tonnes last year. “This would save us $4 billion.”
Price correction in the global oil market and containing crude imports was expected to save another $1.5 billion, Chidambaram said.
“All this will save us $5.5 billion and I am not counting on import compression measures such as raising import duty on non-essential items, which we will notify Parliament soon,” he said.
Besides raising import taxes on luxury goods, Chidambaram said he could also count on savings from possible larger import of crude from Iran. A clutch of merger and acquisition proposals from pharma firms, including a plan to buy out a local firm for Rs 5,168 crore by US-based Mylan, could be considered also.
Last year, fund inflows were strong and the government did not have to dip into its forex reserves of $296 billion to fund the CAD. The forex reserves are adequate to cover about seven months of imports - the lowest import coverage ratio in a decade.
Last year, Chidambaram was able to cap the fiscal deficit at 4.9 per cent of GDP against a budget projection of 5.2 per cent. The CAD has, however, defied a solution - and became the talking point for investors and rating agencies.
The RBI has said its comfort level for CAD is 2.5 per cent of GDP. Last year, the CAD ballooned to 4.8 per cent of GDP. By commiting to an absolute number for CAD — instead of a less onerous percentage figure — Chidambaram has decided to play brave, especially because the deficit is shaped by uncertain factors — for example, the foreign investors desire to invest in India — over which the government cannot have too much control.