The Reserve Bank of India (RBI) and the Planning Commission blamed the rupee’s recent slide on the twin deficits - current account and fiscal - after the Indian currency touched Rs 57 a dollar, the lowest level in almost a year. The rupee closed at 56.85 on Thursday.
The Planning Commission said the average annual economic growth in the 12th Five-Year Plan (2013-17) could be up to 7.9 per cent against its earlier projection of eight per cent.
K C Chakrabarty, deputy governor of RBI, said the rupee was depreciating due to the high deficits on the current account and fiscal sides, and assured the central bank would take steps to check the volatility. “The issue is that... if we have a CAD (current account deficit) and fiscal deficit, the rupee has to orderly depreciate and if it doesn't depreciate orderly, some time it would be depreciating inorderly," Chakrabarty told reporters.
Authorities will do everything to see that volatility is minimised, he added, declining to disclose the exact strategy of RBI.
Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters the high CAD was causing the rupee depreciatione. "Let’s face it, in a situation where there is a large current account deficit, you don’t expect the rupee to strengthen. I am not surprised if it is weakened.”
The dollar is appreciating across all currencies and the rupee hadn’t weakened as much as some of its peers, he said, adding CAD would be less than five per cent in 2013-14. “The comfort level for CAD is 2.5 per cent and we will approach towards that by the end of the 12th Five-Year Plan. To do that, we will have to improve CAD by 0.6 per cent per year as we have about four years left in the Plan period."
India's CAD touched a record 6.7 per cent of gross domestic product (GDP) in the December 2012 quarter. It is expected to be around five per cent in 2012-13 against 4.2 per cent in the previous year, a record at that point of time. Even in the balance of payments (BoP) crisis of 1991-92, CAD had stood at much lower three per cent.
However , India's position in relation to other external parameters is quite stronger now, compared with the BoP crisis period of 1990s. Despite high CAD, it did not draw down on foreign exchange reserves, barring marginally in the second quarter of 2012-13.
The Centre's fiscal deficit came down in 2012-13 to 4.9 per cent against the revised estimates (RE) of 5.2 per cent. But this was achieved by cutting Plan expenditure by over 17 per cent in RE compared to the budget estimates of 2012-13.
In an economy where growth is still a concern, such a huge cut in Plan expenditure may prove counter-productive. As such, finance minister P Chidambaram had said the focus would be on revenue augmentation and not on expenditure cut this financial year to bring down fiscal deficit to the targetted 4.8 per cent.
Ahluwalia warned economic growth may slip to 5.5 per cent a year on an average in the Plan period if there is a logjam in policy making. "We have lost quite a bit of ground due to the decade-low growth of five per cent in FY13, which is the first year of the 12th Plan."
Asked about the criticism coming from Sharad Pawar-led Nationalist Congress Party that the government was obsessed with GDP growth, Ahluwalia said: “I don’t know who has said what, it’s a country of free speech,” adding: “We have never formulated our objective as growth, we have said inclusive growth. It’s certainly not true that we are obsessed with GDP numbers.”
Ahluwlia further emphasised on cutting petroleum and fertiliser subsidies. “The present price of fertilisers is leading to excess use of urea which is actually damaging the soil. We should cut that subsidy and put that back in agriculture in ways of strengthening watershed management.”
He added the goods and service tax regime would not come in force before general elections next year, and called for greater focus on the indirect taxation front which will help prop up sagging growth.