Large fiscal deficit, CAD impact market confidence: IMF

Washington: India’s large fiscal and current account deficits have impacted market confidence, the IMF has said emphasising that the rupee decline posed both challenges and opportunities for the country.

“The current situation presents a challenge, obviously, to the government of India, but also an opportunity for the government to continue with its policy efforts on a variety of fronts,” International Monetary Fund (IMF) spokesman Gerry Rice said.

Rice said the combination of large fiscal deficit and Current Account Deficit (CAD), reliance on portfolio inflows, among other things, have affected market confidence.[caption id=“attachment_1073305” align=“alignleft” width=“380”]  In a nosedive. Andrew Middleton/Flickr[/caption]

“But may be just stepping back on the situation in India, the combination of large fiscal and CAD, high and persistent inflation, sizable unhedged corporate foreign borrowing and reliance on portfolio inflows are longstanding vulnerabilities that have now been elevated as global liquidity conditions tighten, and this clearly has affected market confidence,” Rice said in response to a question.

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The Indian economy is battling depreciating rupee and low investor confidence. The currency has dropped over 23 percent since April and had touched a low of 68.80 to a dollar earlier this week.

The CAD, which is the difference between the inflow and outflow of foreign exchange, scaled to a record high level of $88.2 billion or 4.8 percent of GDP in 2012-13. The government expects to bring it down to $70 billion this year.

With various fiscal tightening measures, the government was able to restrict fiscal deficit to 4.9 percent of GDP in 2012-13.

To a query on the possibility of India selling its gold reserves to the IMF to prop up its currency, Rice said, “I wouldn’t want to speculate on any support or programme needs.”

Meanwhile, the US India Business Council (USIBC) president Ron Somers emphasised on taking steps to restore investors’ confidence.

“Bold leadership that continues to open India’s economy and which advances reforms will help staunch the rupees’ slide,” Somers said.

Lifting FDI caps in insurance should be the highest priority, while resisting protectionist measures-such as forced manufacturing and backsliding on Intellectual Property protection-is crucial, he said.

On the Land Acquisition Bill, Somers said, certainly, the existing law dating back to 1894 requires modernisation.

“However, my hope is that the outcome does not discourage investment in the essential sector of infrastructure. Both investment and infrastructure are the need of the hour,” Somers said.

PTI