Financing a high current account deficit a challenge: ADB

Business

oi-Sunil

By Sunil Fernandes

Published: Tuesday, April 9, 2013, 10:03 [IST]

Financing India's high current account deficit will be a challenge in an environment of global uncertainty and sluggish domestic growth, the ADB's latest Asian Development Outlook 2013, has said.

"Between FY2008 and FY2012, cumulative net capital flows have fallen short of financing the deficit, causing reserves to stagnate. With the current account deficit breaching 4% of GDP in recent years, India has become increasingly reliant on external capital to finance the deficit. Th e worsening of the current account deficit has been mainly on account of a deteriorating the trade defi cit, which has exceeded 10% of GDP in recent years. With external demand remaining tepid, exports in the near future are unlikely to grow at the robust rates experienced during FY2003-FY2007, "the ADB has stated.

According to the bank further, the supply side constraints and policy disarrays that have stalled domestic industrial and investment activity have also hindered exports.

"Fiscal subsidies provide little incentive to ration demand for commodities, and structural bottlenecks hamper the production of goods such as coal, fertilizers, and iron ore, inducing growth in imports that are relatively
inelastic in response to price and currency movements. Moreover, high inflation in recent years has made gold an attractive form of savings, causing imports to surge," ADB has noted.

"The invisibles surplus, which previously cushioned the trade deficit, is likely to moderate with weak recovery in advanced economies and low incremental spending on items such as software and business processing services. Investment income outflows, including interest payments, profits, and dividends, will remain elevated, reflecting the rising stock of FDI, portfolio investments, and external loans. Consequently, the current account deficit is expected to remain elevated," the bank has stated.

Meanwhile, the bank has said that rising private consumption and stronger intraregional trade will spur a pickup in growth in developing Asia in 2013 and 2014, as economic activity in the US and Europe remains in the doldrums.

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