Government brings in 5 big measures to get widening CAD under control
The five steps announced following a meeting chaired by Prime Minister Narendra Modi to review the state of the economy include scrapping withholding tax on masala bonds — rupee-denominated debt sold overseas — and relaxations in the overseas debt regime.
Modi was briefed by Reserve Bank of India governor Urjit Patel and finance ministry officials, finance minister Arun Jaitley told reporters after the meeting late on Friday.
The decisions are aimed at checking the current account deficit (CAD) and increasing foreign exchange inflows, Jaitley said. The government will also take steps to promote exports and restrict non-essential imports, he said.
Jaitley said the items on which import restrictions would be imposed will be finalised in consultation with stakeholder ministries and departments to ensure they are in sync with WTO norms.
The items most likely to face curbs are gold, mobiles and other electronic items. “To address the issue of expanding CAD, the government will take necessary steps to cut down non-essential imports and increase exports,” Jaitley said. “The commodities of which imports will be cut down will be decided after consultations with concerned ministries and will be WTO-compliant.”
The RBI and department of economic affairs have suggested more measures and a decision on these will be taken over the next few days.
The five steps unveiled to boost capital flows include a review of mandatory hedging conditions for infrastructure loans and permitting manufacturing sector entities to avail of external commercial borrowing up to $50 million with a minimum maturity of one year. Doing away with mandatory hedging for now will reduce demand for dollars.
The government also proposed to remove exposure limits of up to 20% of an FPI bond portfolio to a single corporate group, and 50% to a single company. RBI tightened foreign bond purchases in April this year in an attempt to restrict the flow of hot money into Indian markets. Withholding tax on masala bonds will be scrapped for issuances in the current financial year.
The rupee closed at its highest in a week at 71.84 against the dollar on Friday in anticipation of measures to rein in the decline, marking a second consecutive day of gains after the Indian currency touched a record intra-day low of 72.90 on Wednesday. The stock market also rallied for a second day with the Sensex reclaiming the 38,000 mark.
“The moves will help the rupee open stronger on Monday but we need more details on which non-essential items are being considered,” said Aditi Nayar, principal economist at ICRA.
Jaitley also pledged to hold the line on the fiscal deficit, pegged at 3.3% of GDP in the current fiscal year. “Our growth rate is much higher compared to the global average, inflation is within range.
From the finance ministry side, the effort will be to maintain the fiscal deficit and we are confident we will be able to maintain fiscal deficit,” he said. Though the economy is strong, external factors were causing nervousness, he said. “The areas where we need to become strong are oil and rupee — we have to fight this challenge,” he said, adding that government will look to increase exports and curb nonessential imports. India’s current account deficit deteriorated to 1.9% of GDP in FY18 from 0.6% in the year before and is forecast to rise to around 2.8% in the current year.
The trade deficit has widened to $80.4 billion in the first five months of the current fiscal from $67.3 billion in the same period last year Amid the turmoil triggered by rising US interest rates, a global trade war that may intensify and strengthening crude prices, the currencies of countries running current account deficits have come under pressure, the Indian rupee included. Economic affairs secretary Subhash Garg said the measures announced on Friday would have an impact of about $8-10 billion dollars.
Asked about the prospect of issuing bonds to non-resident Indians to raise dollars, Jaitley said several measures had been discussed but these would be announced as and when a final decision was taken.
Some experts felt that these steps may not have too much of an effect given global sentiment. “Today we are looking at negative sentiments towards emerging markets and, with all the depreciation, we may not get much water in,” said Abheek Barua, chief economist, HDFC Bank. “There is no appetite in global markets, so these measures may not assuage the concerns and do much for the rupee.”