Chidambaram says CAD to be much lower than initially forecast

The minister also said economic growth closer to 5.5 percent should be considered very satisfactory and that there is "still some speculation" in the forex markets.

Updated: Oct 02, 2013, 18:09 PM IST

Srinagar: Buoyed by better-than-expected Q1 current account deficit (CAD) numbers, Finance Minister P Chidambaram on Wednesday said he is confident of closing the fiscal with a better set of numbers than initially projected.

The minister also said economic growth closer to 5.5 percent should be considered very satisfactory and that there is "still some speculation" in the forex markets.

The CAD for April-June was USD 21.8 billion or 4.9 percent of GDP. The government's target for the financial year is USD 70 billion or 3.7 percent of GDP.

"I think we will be comfortably below USD 70 billion. At the moment, I will stick to USD 70 billion. When the second-quarter numbers are announced, then I will give a better number," Chidambaram told reporters on the sidelines of a function to celebrate the platinum jubilee of J&K Bank here late last evening.

Chidambaram said the Q1 CAD was "exaggerated by the very sharp rise in gold imports in April and May." He said the total quantity of gold imported in Q1 was about 345 tonnes.

"In the second quarter, I have seen up to September 25, gold import is only about 63 or 64 tonnes. So there is a sharp compression in gold imports. So if you net out gold imports, we'll find that CAD is a very manageable number."

The minister reiterated that he will not allow the red lines drawn on CAD and the fiscal deficit to be breached.

"When we draw a red line, we will remain within the red line," Chidambaram said.

The CAD, which is the difference between foreign exchange earned and spent, touched a historic high of 4.8 per cent of GDP in the previous financial year.

Concerns about CAD increased as foreign investors began pulling out of the country after the US Fed hinted at withdrawing its easy money policy earlier than expected.

As a result, the rupee fell and lost close to 30 percent between April 2 and September 3. Foreign investors pulled out almost USD 13 billion, mostly from debt instruments.

Asked about the trimming of this fiscal year's GDP growth forecasts by analysts, Chidambaram said, "I have never predicted a growth rate. Whenever I have predicted a growth rate, I have simply reported what the RBI has said or the PMEAC (Prime Minister's Economic Advisory Council) has said.

On September 13, the PMEAC lowered the growth forecast for the current fiscal to 5.3 percent from 6.4 percent projected previously. The RBI had earlier lowered its growth estimate to 5.5 percent from 5.7 percent. GDP grew by 5 percent in 2012-13.

"I don't set much store by what analysts or broking houses say. They come up with one number in the morning and another in the evening. I think it's fair to say that growth will pick up in the second half. I think anything higher than 5 percent and anything closer to 5.5 percent should be considered a very satisfactory movement forward," he said.

Chidambaram exuded confidence that Q2 GDP growth would be better than Q1, when the economy expanded 4.4 percent.

"Exports are showing robust growth. Credit growth to select industries is showing good growth. For example, credit to two-wheelers sales, small and medium enterprises sector, retail, all that is growing. I think it's too early to call it a victory yet, let us wait for a couple of months. But I am sure that the second half will be better than the first half," Chidambaram said.

On the Fed's tapering of its stimulus programme, the finance minister said, "To assume that the tapering will have no impact on our economy is naive. There will be some impact on us, as there will be an impact on every economy."

Chidambaram said the government and the RBI have many steps to cushion the impact of tapering, including measures to boost inflows.

"I think inflows will pick up in October-November and that is one measure that will give us a cushion. But, there are other measures. Other measures have been announced, other measures are in the works. We will do our best to see that the impact is minimal," Chidambaram said.

On the rupee, the minister said the fact that it is trading at 62-63 to the dollar shows that there is still some speculation in the market. The rupee closed at 62.46 against the dollar on Tuesday. It was at 54.29 at the end of March.

Last week, Chidambaram said the value of the rupee based on the real effective exchange rate (REER) was 59-60. He also told exporters that even at 60, the rupee was competitive.

"The rupee value of 59-60 to the dollar is not a number I pulled out of the hat. It is based on the REER which is published by the RBI. The rupee is hovering between 62-63 now. It means that there is still some speculation in the rupee. All genuine demand for the dollar is being met."

Chidambaram called on dollar and foreign-exchange earners to bring the funds back to the country as early as possible.

"I think if the inflows pick up -- they have picked up in the last three weeks -- it is possible that the rupee will move towards 60."