External sector doing remarkably well, says Reserve Bank of India

The Dollar Business Bureau | @TheDollarBiz   The Reserve Bank of India (RBI) says that policy efforts, improvement in exports and a steep decline in imports helped reduce the full year current account deficit (CAD) in FY2013-14 to $32.4 billion or 1.7% of GDP (valued at around $1.9 trillion) from the large deficit of 4.9% of GDP recorded in Q1 of FY2013-14. “Following a lower trade deficit accompanied by robust growth in services export and stable flows of remittances, CAD declined to 1.7% of GDP in 2013-14,” the RBI says in its Annual Report (ended June 30, 2014). Policy decisions to curb gold imports last year were effective, and other factors such as low international prices of oil, fertilisers and coal helped reduce India’s overall imports. The slowdown of India’s economy also led to lower import demand in FY2013-14. Meanwhile, exports improved due to stronger demand and a weak rupee. However, the RBI says that CAD is expected to increase in FY2014-15 and further expenditure cuts and better targeting of subsidies (of particularly oil subsidies) will be required to check this. Economic growth will also likely fuel import demand this year. According to the RBI, the Indian economy could grow at around 5.5% in FY2014-15, compared to below 5% growth rates in the previous two years. The RBI says that restrictions on gold imports for genuine trade purposes may be gradually withdrawn this year. The Bank expects the rupee exchange rate to remain competitive in FY2014-15, but suggests that sector-specific issues hampering exports -- especially in pharma, iron ore and coal -- should be addressed to help exports grow. The rebuilding of foreign exchange reserves in recent months to $316.14 billion at end June, 2014 (up around 12% from year ago levels of around $282.45 billion) will help India buffer the economy against potential shocks,” says the RBI. The Bank also adds that the priority sector guidelines will be reviewed in FY2014-15 to ensure efficient use of resources. Recently, the Federation of Indian Exporters Organisation (FIEO) had reiterated its demand that export credit should be included in Priority Sector Lending (PSL).