India: Fiscal Deficit

For those who might remember, the warning from Moody’s had come close on the heels of India's current account deficit reaching a record high of $22.3 billion, or 5.4 per cent of GDP in the quarter ending September 2012, from less than $16.4 billion in the April-June quarter; and from around 1 per cent during 2000s. Moody’s blamed government policies, citing examples of similarly ranked nations with similar energy import bills who fared much better than us. While this news is quite dated and well known, the fact is that the resulting efforts by the finance ministry to contain the same has been quite unstructured.

In a discussion with industry representatives some days back, Union Finance Minister P. Chidambaram commented that the current account deficit was "the more worrying deficit." Later, he also commented, "I can only appeal to people, if we don't import gold for a year, half of our current account deficit will disappear." That's quite a worrisome statement if the speaker happens to be the finance minister; as this clearly points to the fact that the finance ministry seems to be flailing its arms around without having a strict strategy to address the current account deficit. But then again, it can't be said that Chidambaram is not trying. His foreign tours, with a direct focus on motivating foreign investment, have increased dramatically. In January, he visited Singapore, Frankfurt and London and Hong Kong. Next month, he is planning to go to US, Canada and Japan.

With the October-December 2012 overall deficit data about to be released, the fear in economic quarters is visible.  But there is hope. India's trade deficit was $48.3 billion in the July-September quarter. The trade deficit fell to $14.92 billion in February 2013. Yet, with the annual trade policy about to be announced by the end of March, and the RBI monetary policy review coming up on March 19, the Indian economy is truly facing the last step before the cliff. One wrong move, and a crash is imminent.