When the Q3 balance of payments data comes out Thursday, RBI Governor D Subbarao has already warned us, the current account deficit (CAD) is likely to be much worse than it was for Q2. While Q2 CAD was a record 5.4% of GDP, a Citi estimate puts the likely Q3 CAD at a whopping 6.5% of GDP. While we have to wait for Thursday to know if the estimate is right, a sharp worsening looks likely since, even after a 4% yoy hike in February exports, April-February exports are down 4% yoy. And while many attribute this to slowing global export markets, the fact is that China’s share of global exports rose from 3.9% in 2000 to 10.5% in 2011 and then to 11.2% in January-October 2012, while India’s rose from 0.7% to 1.7% before falling to 1.6% in the same period. While India’s exports fell 4.5% yoy in the first 9 months of this year, China’s rose over 8%, Hong Kong 4.6%, Philippines 8.6%, Vietnam 16.4% and Thailand 4.6%. More worrying, India’s manufactured exports have fallen—manufactured goods comprised 78.8% of India’s FY01 export basket but this was down to just 64.5% in April-November FY13. Of the top 50 global imports, India has just 6 items.
Which is why, with the ability to control the CAD somewhat limited, in even the medium term, the government appears to have shifted focus to financing the CAD—while FDI covered the CAD a few years ago, FDI now covers just around a fourth of the CAD. Last week, the government removed the sub-limit restrictions for various categories of FII investments. Effective April 1, there will be only two ceilings—a $25 billion ceiling for investments in government securities and a $51 billion sub-limit for corporate bonds. In addition, the government has also been encouraging NRI deposits by deregulating interest rates, relaxing ECB norms and postponing GAAR to 2016. The problem with the liberalised financing norms, however, is that they also result in outflows. A little noted factor in the Q2 deterioration was that, between the sharp hike in repatriation of profits and interest payments on FII/ECB, this added up to nearly 2% of GDP, up from 1.6% of GDP in Q1FY13 and 1.4% of GDP in most of FY12. While in the short run the government may have to look at solutions like the Resurgent India Bonds, in the long run there is no alternative to finding ways to stimulate more FDI inflows.