India’s current-account deficit widened to a record last quarter as oil and gold imports surged, adding pressure on the government to extend a policy overhaul and attract foreign investment as the rupee weakens.
The deficit in the current account, the broadest measure of trade, was $32.6 billion in the three months ended Dec. 31, or 6.7 percent of gross domestic product, compared with a revised $22.6 billion gap from July through September, the Reserve Bank of India said in a statement yesterday. The median estimate of 12 economists in a Bloomberg News survey was for a deficit of $30.7 billion.
Prime Minister Manmohan Singh’s government has said it will liberalize rules for foreigners buying rupee bonds from April 1 as it pursues policy changes to revive a faltering economy, including opening up aviation and retail industries to attract more overseas investment. India may need more than $75 billion of foreign capital this year and next to fund the deficit, Finance Minister Palaniappan Chidambaram said in an interview this month.
“The current account will depend on inflows and the government is accelerating measures to boost them, but they need to address the structural issues,” said Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd. “There will be some improvement in the last quarter because the trade deficit will be narrowing and exports have accelerated a bit.”
The rupee, which has lost 6.6 percent in the past year against the dollar, strengthened 0.2 percent yesterday to 54.28, according to data compiled by Bloomberg, as the S&P BSE Sensex rose 0.7 percent. The benchmark 10-year bond yield slid 4 basis points, or 0.04 percentage point, to 7.95 percent.
India’s exports rebounded 4.2 percent in February after dropping in nine of the past 12 months as Europe’s debt crisis curbed overseas sales. The government plans to provide incentives to exporters in its annual trade policy due early next month as part of its push to bridge the trade gap.
Policy makers are reviewing foreign direct investment caps in almost two dozen sectors and plan to scrap or liberalize some of them, the finance minister said. A revamp since September has included curbing of fuel subsidies and speeding up stalled road, rail and port projects.
The current-account and fiscal deficits have been cited by the Reserve Bank of India as among the reasons preventing a decline in borrowing costs. Governor Duvvuri Subbarao lowered the benchmark repurchase rate by quarter-percentage to 7.5 percent on March 19, signaling “limited headroom” for further reductions.
The $1.8 trillion economy will probably expand 5 percent in the financial year ending March 31, according to government estimates, the slowest pace in a decade.
The government plans to cut the budget deficit to 4.8 percent of GDP next year, from an estimated 5.2 percent this year, seeking to avert a downgrade in credit ratings after Standard & Poor’s and Fitch Ratings lowered the sovereign outlook to negative, a step closer to junk status.