Government to announce major package next week to curtail widening CAD

The finance ministry will announce a major package next week as part of an all-out effort to curtail the widening current account deficit (CAD), which has sent the rupee into a free fall and further weakened the economy.

A top finance ministry official told Mail Today on Tuesday that the "war on CAD" package, comprising a combination of import compression, long-term external commercial borrowing and foreign capital flow management, is being given the final touches. There is tremendous pressure to curtail CAD due to a major decline in exports and the outflow of foreign capital, triggered by fears that the US Federal Reserve would start tightening monetary policy to reduce liquidity in the banking system. A high CAD is the direct outcome of export earnings falling short of the import bill leading to a shortage of dollars.

Import curbs
The customs duty on non-essential commodities such as electronic goods, cars and high-end bikes is likely to go up in order to discourage their import. Finance ministry officials are preparing a list of items which would be taken up soon. Finance minister P. Chidambaram had indicated that the government will attract funds from non-resident Indians and clamp down on the import of non-essential items such as electronics.

The government also expects to contain gold imports to the last year's level of 845 million tonnes to save a considerable amount of foreign exchange, which would help contain CAD. The country spent a whopping $50 bil-lion on gold imports last year.

The finance ministry is also banking on the Reserve Bank of India (RBI) easing interest rates and injecting more money into the system to revive the economy once the rupee stabilises and volatility in the cur-rency market is reduced. RBI may have to continue its strategy of squeezing rupee liquidity in the money market as meas-ures taken so far have failed to reverse the tide.

The rupee sank to a record intra day low of 61.80 in early trade on Tuesday forcing RBI to intervene in bringing more dollars into the market to stem the slide. This helped the rupee to close at 60.77 at the end of the day. However, for Indians going abroad, the exchange rate of the rupee at the retail money changers works out to over Rs 64 to the dollar.

Market experts expect the rupee to drop further unless the government and RBI take drastic steps. "Towards the end, RBI intervened in the market through public sector banks to support the currency," said Pramit Brahmbhatt, chief executive officer, Alpari Financial Services (India). Negative sentiment will push down the rupee further to trade near 62 levels in coming days, he added.

Crisil chief economist DK Joshi said that since CAD is a structural problem that cannot be reduced very quickly, the government will have to send a positive signal to attract more foreign capital in the short run.

Courtesy: Mail Today