According to Nomura, the government’s broad strategy throws up no surprises and is mildly disappointing, given the build-up of expectations, also the measures broadly fall in the category of quick fix solutions and there is no detail on sustainably lowering the CAD
Finance Minister P Chidambaram on Monday unveiled much-anticipated proposals to narrow the FY14 current account deficit (CAD) at $70 billion or an estimated 3.7% of gross domestic product (GDP).
Speaking in the Lok Sabha, the finance minister outlined the government’s broad strategy to address balance of payments concerns. This includes steps to compress oil and gold import demand, curb on imports of non-essential items, liberalizing external commercial borrowing (ECB) norms for companies, allowing oil companies to raise additional funds via the ECB, allowing sale of quasi-sovereign bonds by state companies, and to liberalise non-resident Indian deposit schemes.
However, Nomura Financial Advisory and Securities (India) Pvt Ltd, said the government’s broad strategy throws up no surprises and is mildly disappointing, given the build-up of expectations. The measures broadly fall in the category of quick fix solutions and there is no detail on sustainably lowering the current account deficit, it added.
"While the government’s estimate of a smaller current account deficit is in line with our view, the real issue is financing the deficit. Weak domestic growth prospects suggest that portfolio equity inflows and overseas borrowings will be much lower this year. Hence, we expect net capital inflows to slow, which will make financing the current account deficit difficult. Hence, we expect balance of payment pressures to continue,' Nomura said in a note.
Amid din and uproar in the House over various issues including Telangana, the Minister said, "notifications in respect of tariff rates will be laid before Parliament in the usual course."
He said that with the fresh measures, "CAD will be contained at $70 billion, while the inflows will increase to a level that will be sufficient to finance the CAD.
"If the CAD is contained at $70 billion, it will amount to 3.7% of the GDP as against 4.8% FY13," he said in a statement.
Stressing that like the global economy, Indian economy too is facing challenges, the Minister said, "We believe that we have to do more to contain CAD, to reduce volatility in the currency market and to stabilise the rupee."