CAD, rising deficit to slow growth: Citi

Mumbai: Citigroup Global Markets has warned further downside risks to the economy, saying that the problems facing it by way of ballooning current account (CAD) and fiscal deficits are much more than they appear to be.

Stating that the fiscal deficits and CAD are “not twins but quadruplets,” a Citigroup report said, these are no longer a baby problem but of much larger implications. [caption id=“attachment_294693” align=“alignleft” width=“380” caption=“Warning of slowdown. Reuters”]  [/caption]

“Given the rise in each of these deficits - CAD at 4.3 percent of GDP, fiscal deficit at 5.9 percent due to government profligacy, self-inflicted governance issues and the cyclical liquidity crunch, the country’s growth story has likely de-rated,” the report said.

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Stating that these quadruplet deficits are feeding on themselves, the report stated there is no simple fix as the vicious deficit mix is feeding on and across itself.

“The solution lies in, first, an aggressive thrust on fiscal consolidation, policy and reforms; and second, the country needs a bit of luck on lower oil prices, weaker inflation and stronger capital flows. It needs a mix of both to regain its luster and at least one of the two to maintain its current momentum,” the report said.

On the macro front, it said consensus suggests the growth slowdown is bottoming, now clearly forecasting 6.5-7 percent growth, rather than the 8-8.5 percent average of the 2000-10 period.

“On other macro variables, our FY13 forecast factors in the current account deficit staying at 4 percent of GDP, fiscal deficit at 8.4-8.8 percent factoring in the Centre’s deficit at 5.5 percent, and including SEB losses; and core inflation averaging at 7.4 percent in FY13 against 8.8 percent last fiscal,” the report said.

On the interest rates and the rupee, which shed close to 4 percent in April alone after losing nearly 18 percent in 2011, the report said, “taking into account the RBI’s guidance on growth and inflation, we expect at best one more round of interest-rate easing. Failure to revive growth can alter expectations later on.

“On the rupee, a widening CAD coupled with a non-conducive environment for capital flows will lead to a persistent drawdown in reserves and pressure on the rupee. As a result, our global forex team expects the rupee to depreciate over 6-12 months to 54 to a dollar,” the report warned.

PTI