We organised a conference call on 20 August, 2013 with Economic Affairs Secretary
Mr Arvind Mayaram to get an update on the government’s action plan in respect of a
sharply depreciating rupee. Mr Mayaram said the steep downward movement
witnessed in the past few days in the securities and currency markets is primarily a
panic reaction to external factors. Other countries like Indonesia, South Africa and
Brazil too faced the same stress in their markets, he said. As far as the internal
factors are concerned, he said the concerns are two-fold: the current account deficit
(CAD) expected to remain high in the current fiscal year and the inability of the
government to finance its CAD given India’s huge dependence on foreign inflows.
These concerns have aggravated on fears that the US Federal Reserve may taper its
bond purchase programme which could reduce foreign inflows and end up drawing
down the country’s foreign exchange reserves. However, Mr Mayaram said this line of
thinking is completely unwarranted because the government has come out with
estimates and set targets so that the CAD is contained and at the same time financed
without a draw-down on foreign exchange reserves. In a worst-case scenario, if
exports remain at the level witnessed in FY13, FII inflows come to a standstill and
also foreign direct investment (FDI) stays flat at the FY13 level, then the CAD is seen
at US$75bn.
The two-pronged strategy of the government to address the US$75bn CAD and the Balance
of Payments situation is as follows:
1. Compression of imports:
a. Precious metal imports: The government aims to curtail imports of precious
metals like gold, silver and platinum. It believes that if gold imports are curtailed at
850mt in FY14 compared to 950mt in FY13, then the CAD would get compressed
by around US$4bn, bringing it down to US$71bn from US$75bn.
b. Oil imports: The import growth has declined. To cite an instance, growth in oil
imports in 1QFY14 stood at 0.8% YoY compared to 18% in 1QFY13.This
indicates that the compression in oil imports by around US$1bn in FY14 over
FY13, would aid in bringing down the CAD to US$70bn in this fiscal year.
2. Capital account:
According to the government, if capital inflows into India are estimated at US$64bn,
then to bridge the CAD gap the country needs only US$6bn (US$70bn minus US$64bn
= US$6bn). However, the measures taken by the government to enhance capital inflows
into the country are expected to bring in an additional US$11bn over and above the
estimated US$64bn. Consequently, India would be able to accrue US$5bn to its foreign
exchange reserves.
The government expects the CAD at 3.7% of the gross domestic product (GDP).
While the FIIs remained net buyers in the equity segment, the bond-sell off was on concerns
over likely tapering of QE3 (Quantitative Easing 3) programme by the US Fed and
hardening of US bond yields. Debt market outflow was also due to unhedged foreign
exposure of the corporate sector. However, long-term investment by foreign investors is
expected to continue at the levels witnessed before the onset of QE3 programme. FIIs seem
to be more confident about the Indian economy compared to domestic investors.
The capital flight, especially from bond market, is primarily because of the steep surge in US
bond yields. Also, it is important to note that the US Fed may not be able to withdraw its
QE3 programme completely, given its domestic macro-economic compulsions. The Indian
government has no intention to put capital controls. The recent measures do not indicate
that India is in a crisis situation as the country has a buffer of US$280bn of foreign
exchange reserves.
��
Mr Arvind Mayaram to get an update on the government’s action plan in respect of a
sharply depreciating rupee. Mr Mayaram said the steep downward movement
witnessed in the past few days in the securities and currency markets is primarily a
panic reaction to external factors. Other countries like Indonesia, South Africa and
Brazil too faced the same stress in their markets, he said. As far as the internal
factors are concerned, he said the concerns are two-fold: the current account deficit
(CAD) expected to remain high in the current fiscal year and the inability of the
government to finance its CAD given India’s huge dependence on foreign inflows.
These concerns have aggravated on fears that the US Federal Reserve may taper its
bond purchase programme which could reduce foreign inflows and end up drawing
down the country’s foreign exchange reserves. However, Mr Mayaram said this line of
thinking is completely unwarranted because the government has come out with
estimates and set targets so that the CAD is contained and at the same time financed
without a draw-down on foreign exchange reserves. In a worst-case scenario, if
exports remain at the level witnessed in FY13, FII inflows come to a standstill and
also foreign direct investment (FDI) stays flat at the FY13 level, then the CAD is seen
at US$75bn.
The two-pronged strategy of the government to address the US$75bn CAD and the Balance
of Payments situation is as follows:
1. Compression of imports:
a. Precious metal imports: The government aims to curtail imports of precious
metals like gold, silver and platinum. It believes that if gold imports are curtailed at
850mt in FY14 compared to 950mt in FY13, then the CAD would get compressed
by around US$4bn, bringing it down to US$71bn from US$75bn.
b. Oil imports: The import growth has declined. To cite an instance, growth in oil
imports in 1QFY14 stood at 0.8% YoY compared to 18% in 1QFY13.This
indicates that the compression in oil imports by around US$1bn in FY14 over
FY13, would aid in bringing down the CAD to US$70bn in this fiscal year.
2. Capital account:
According to the government, if capital inflows into India are estimated at US$64bn,
then to bridge the CAD gap the country needs only US$6bn (US$70bn minus US$64bn
= US$6bn). However, the measures taken by the government to enhance capital inflows
into the country are expected to bring in an additional US$11bn over and above the
estimated US$64bn. Consequently, India would be able to accrue US$5bn to its foreign
exchange reserves.
The government expects the CAD at 3.7% of the gross domestic product (GDP).
While the FIIs remained net buyers in the equity segment, the bond-sell off was on concerns
over likely tapering of QE3 (Quantitative Easing 3) programme by the US Fed and
hardening of US bond yields. Debt market outflow was also due to unhedged foreign
exposure of the corporate sector. However, long-term investment by foreign investors is
expected to continue at the levels witnessed before the onset of QE3 programme. FIIs seem
to be more confident about the Indian economy compared to domestic investors.
The capital flight, especially from bond market, is primarily because of the steep surge in US
bond yields. Also, it is important to note that the US Fed may not be able to withdraw its
QE3 programme completely, given its domestic macro-economic compulsions. The Indian
government has no intention to put capital controls. The recent measures do not indicate
that India is in a crisis situation as the country has a buffer of US$280bn of foreign
exchange reserves.
The recent liquidity tightening measures by the Reserve Bank of India (RBI) were primarily to curb
speculation, as speculators went short on the rupee, creating volatility in the currency market. The RBI’s
intention was to jack up short-term interest rates, which began to reflect in long-term yields as well. The RBI
has announced some fresh measures to ease the liquidity situation by adopting a calibrated approach.
The government is confident of achieving 5.5% YoY growth in GDP compared to 5.0% in FY13. This is
expected to be achieved on the back of various measures taken to achieve its growth target. For instance,
projects worth US$27bn have been approved and are likely to be commissioned in the next two-three years.
Private projects in sectors like steel, aluminum, textile etc. are also been looked into and are likely to be
approved in the next 60 days. These measures are likely to give a thrust to GDP growth.
In FY13, to adhere to its fiscal consolidation roadmap and the finance minister’s commitment to contain the
fiscal deficit at 5.3% of GDP, the government had slashed planned expenditure by around Rs1.2trn which
apparently shaved off ~1% of GDP growth in FY13. Therefore, an increase in government expenditure by
around Rs100bn would increase GDP growth by around 10bps.In a worst-case scenario, even If the
government has to slash its expenditure by Rs200-Rs250bn in FY14 to meet the fiscal deficit target, then
GDP growth could fall by only 15bps-20bps. Therefore, the government is confident that the worst is over and
GDP growth will not fall below 5.0% witnessed in FY13. The government does not plan to increase its market
borrowing programme and to meet its fiscal deficit target of 4.8% of GDP in FY14 it prefers to cut
expenditure.
Coal linkage issues have been sorted out and power generation is likely to be around 70,000MW in FY14.
Rationalisation of coal and natural gas prices will also give an impetus to growth as these measures were not
in place in FY13. Therefore, the government has no apprehensions about GDP growth in FY14.
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