Need to step up exports to deal with CAD, says RBI

The Reserve Bank of India has said India would have to increase exports to deal with challenge of high current account deficit (CAD), even as impact of recent steps taken by the government, including curbs on gold imports, are yet to be tested.

Surging gold imports is one of the reasons for India's high CAD that touched 6.7 per cent of GDP in the October-December quarter.

"Recently, import duty on gold has been raised and bank finance against pledge of gold has been restricted. The efficacy of these measures, however, is yet to be tested... Notwithstanding these measures for a fast growing economy like ours, import demand is bound to be high. Hence, we have to step up exports to narrow the trade gap" RBI Executive Director Deepak Mohanty said in a paper presented at the SAARCFINANCE Group Meeting in Islamabad.

He said, however, that in a phase of sluggish global economy, it is difficult to push up exports.

"Nevertheless, initiatives have been taken to diversify trade towards emerging markets. On balance, however, the current account deficit remains high thus needs to be financed through capital inflows," Mohanty said.

The policy measures taken by the government to encourage capital inflows include rationalisation of norms related to foreign institutional investors (FIIs) and permitting foreign direct investment (FDI) in multi-brand retail.

Mohanty said as capital inflows to India have turned volatile, "financing of our large current account deficit has become a challenge".

He further said that while national authorities are taking steps, international financial institutions (IFIs) like the International Monetary Fund (IMF) need to be more proactive to suggest ways to limit the spillover and prompt actions to be taken to arrest further deterioration in global economic condition.

Mohanty said speedy implementation of a complete banking union in the euro area with an integrated regulatory and supervisory structure assumes importance.

Over the medium-term, efforts made to diversify trade towards emerging market and developing economies should be stepped up, he added.

"In this context, there is greater scope for trade and financial integration in the SAARC region which will be mutually beneficial," the RBI official added.

With inputs from PTI