His hope is these steps would help to contain the current account deficit (CAD) at a manageable level, reduce the ongoing volatility in exchange market and stabilise the rupee, which hovered above rs.61 to the dollar over the weekend.

The outlook for the economy in the current fiscal year, going by the first quarter (April-June) trends, is no less bleak than before - with no let-up in industrial downtrend which could hold back investments, persisting consumer price inflation, and a further rise in trade and current deficits in a globally challenging environment. It does not bespeak business confidence at home if some Indian corporates prefer to take investments abroad.

However gloomy it might look, Government has to do everything short of seeking an IMF cover it cannot afford, given India’s emerging power status with a respectable level of reserves, let alone the highly surcharged pre-election atmosphere. But there is no doubt India is borrowing its way out of the mess it has landed itself in, though the convenient alibi for UPA is the global uncertainty, which has caused this situation, not its economic mismanagement.

That apart, the plain fact is that the once-regarded fastest-growing economies like China and India along with Brazil have now slowed down to an extent that global analysts have begun to wonder whether the momentum for driving growth of the world economy is already shifting to the developed world (US, Japan and EU). These emerging economies may still remain fast-growing than others but their macro-economic performance has disappointed foreign investors.

In his statement at the end of the day in Parliament on August 12, Mr Chidambaram sought to play down the seriousness of the crisis, which though warranted his stiff package, by contending India faced only “concerns” of investors about its CAD at a time the world economy is itself “challenged’. He said these concerns were reflected in the pressure on the exchange rate of the rupee.

But, he asserted, Government would be able to contain CAD in 2013-14 at 70 billion dollars (3.7 per cent of GDP), after the 88 billion deficit of last year (4.8 per cent of GDP). The expected inflows would be at a level sufficient not only to finance the estimated CAD like last year but also there would be a small accretion to reserves at the end of March 2014.

In the first four months of the fiscal year ending July, the level of reserves had declined by 11 billion to 280 billion dollars. Broadly, the Finance Minister’s two-pronged drive includes tariff revisions on the so-called non-essential goods, including perhaps further hikes on gold and silver already subjected to similar and other import-restricting measures, which are observed to have had some effect, though marginally in the foreign trade data in the first four months (April-July) this year.

The July trade data show a decline in non-oil imports by 5.26 per cent to 25.39 billion over the 26.80 billion in July 2012. There was also a billion dollar reduction in oil import over the corresponding month of last year reflecting a price differential perhaps or some compression in oil demand, which Mr Chidambaram is aiming at for the rest of the year.

Among measures to enhance capital inflows into India, he has listed raising of “quasi-sovereign bonds” by public sector financial institutions to finance long term infrastructure, such bonds would obviously be backed by Government guarantee. The guidelines for External Commercial Borrowings (ECBs) are being liberalized (further) and public sector oil companies would be directed to raise additional funds through ECBs and trade finance to finance their imports.

Whatever the cost of borrowing and debt build-up, the inflows for oil companies would reduce the outgo from the exchequer and thus help Mr Chidambaram’s primary objective of lowering fiscal deficit. NRI deposits under NRE/FCNR schemes would also be liberalised possibly with a further tweaking of interest rates.

Here also, like portfolio inflows and outflows by FIIs, there have been two-way flows in recent months so that the accruals of NRI deposits have not been in a steady uptrend as was the case earlier. NRI deposits stood at 71 billion dollars at the end of first quarter, June 2013.Taking all the envisaged raisings abroad, the Finance Minister assumes CAD could be contained at 70 billion dollars and “fully and safely financed”.

It is not clear whether the Finance Minister would have also taken into consideration any likely adverse impact from a situation like the firming up of US yields and equity market tremors triggered by the Federal Reserve’s hint of tapering off of its purchases of government securities under its monetary accommodation (QE) from September or later in the year. This would become clearer by the end of August.

RBI recently highlighted the deterioration in the vulnerability indicators of the external sector even while short-term liabilities and maturing debt totaling some 170 billion dollars are due for repayment in 2013-14. No doubt the Finance Minister and other Ministers involved may have taken these factors into account in firming up the present strategy with which to strike a measure of confidence in overcoming the challenge.

But the numbers are far from comfortable even in a medium-term perspective for current account deficit to be brought down to a sustainable level, which was hitherto benchmarked at 2.5 per cent of GDP. Short-term debt (residual maturity) was 44 per cent of total debt at end-March 2013 when India’s external debt, rising rapidly over the last three years, stood at 390 billion. This is mainly due to the sizeable increases in ECBs and trade credits of a short-term nature. India’s net international investment position was (-)16.7 per cent of GDP by end-March.

If there is a marked reduction in gold imports as a result of the further curbs under way, CAD could begin to show some improvement in the second half of the year. The deficit must have risen in the first quarter (April-June) well above the 3.6 per cent of GDP recorded in the last quarter of 2012-13. Besides a significant contraction in gold and non-essential items under import, India will also look for crude oil prices holding steady and exports picking up to some extent with the faint signs of recovery in the developed world.

Based on trends so far, the trade deficit might be headed for 180-200 billion dollars. The latest measures announced by the Finance Minister would hopefully begin to bite and help narrow the deficits and stabilize the rupee which had depreciated by 12 per cent since May. RBI had reiterated in its first quarter review the importance of removing structural impediments constraining export competitiveness. Tightening fiscal deficit and easing domestic supply bottlenecks would also be key to lower current account deficit, according to IMF in its external sector spillover assessment for India. (IPA Service)