It's not just the fisc, CAD is India's Achilles heel
Even in 1991, to put things in perspective, India’s current account deficit (CAD) has never been as high as it is right now—compared to a bit over 3% of GDP then, FY13’s CAD is projected to be 4.8% of GDP. The dramatically weakening CAD is why, despite $24.4 billion of FII money flowing in during FY12, the rupee still fell from 51.3 to the dollar on January 1, 2012, to 54.6 on January 1, 2013. While the rupee has retraced a bit to 53.9 on February 14, keep in mind this is after $8.6 billion of inflows so far in the calendar year—around a third of what came in during 2012 has already come in during less than 45 days of 2013.
While the government remains focused on gold imports being the problem, the fact of the matter is that gold imports are falling, from $41.7 billion in April-December FY12 to $37.8 billion in the same period in FY13. As a proportion of the trade deficit, gold imports were 26% in FY11 and rose to 30.5% in FY12 and then fell to 20.2% in April-December FY13. The real issue remains the sharp fall in exports, by 4.9% in April-January FY13 as compared to a 21.3% growth in FY12. The good news here is that, after 8 months of contraction, exports picked up marginally in January. Whether this sustains remains to be seen, but it could given that global exports growth is picking up—from 5.9% in 2011, global trade growth collapsed to just 2.8% in 2012 and is now projected to rise to 3.8% in 2013. While that should guarantee some export growth, oil imports rose to $140 billion in April-January FY13 on top of a high $156 billion in all of FY12—global growth picking up should harden crude prices. Which is why it is critical the government speed up clearances—one such, for Cairn India, involves giving the company permission to prospect for more oil. If the oil found is to the extent Cairn-ONGC estimate, this means the government will get $15 billion extra in NPV terms. Yet, the permission is nowhere to be seen. Similarly, while the export picture looks gloomy, agriculture exports can rise to a whopping $42 billion from $37 billion in FY12, but this needs the government to be proactive. Just exporting 10 million tonnes of wheat—roughly the amount that is likely to go waste anyway given the lack of storage facilities—will get $3 billion. Fixing the fisc may prove to be easier than fixing the CAD.