Government moves to rein in current account deficit, rupee fall

Arun Jaitley
Arun Jaitley, File Photo

New Delhi, Sep 14 ; To stop further depreciation of rupee and widening of current account deficit (CAD), the government on Friday took five measures and a broad policy decision to curb non-essential imports and increase exports.

Finance Minister Arun Jaitley, after holding a detailed discussion with Prime Minister Narendra Modi, said the government is committed to maintain its fiscal deficit target even as it monitors the impact of external factors on the Indian economy.

“One broad policy decision was to address the issue of expanding current account deficit. The government will take necessary steps to cut down non-essential imports and increase exports,” Jaitley told reporters after the high-level meeting.

The meeting was attended by Reserve Bank of India (RBI) Governor Urjit Patel and senior officers from the Prime Minister’s Office (PMO), Finance Ministry and the RBI.

“The non-essential import items would be decided in consultation with various ministries and will be announced as and when the decisions are taken in the next few days.”

Jaitley said policy decisions by the US increased inflow of dollar in the US economy compared to other economies. The government is monitoring the impact of external factors like crude oil prices and trade wars on India despite its strong fundamentals.

“Due to these two factors our current account deficit has increased. We have to face this challenge,” he said.

India’s current account deficit widened to $15.8 billion, about 2.4 per cent of the country’s GDP in the first quarter of this fiscal as against $15 billion in the year-ago quarter.

Jaitley said while other suggestions from both RBI Governor Patel and Economic Affairs Secretary Subhash Chandra Garg will be considered in the days to come, some issues need immediate action.

“The aim of these five immediate decisions is to attract more foreign currency to India as we try to control the current account deficit,” he said.

He said the mandatory hedging condition for infrastructure loans related to External Commercial Borrowings (ECB) will be reviewed.

In another move, the government has decided to allow manufacturing sector entities to avail ECBs up to $50 million with a minimum maturity of one year, instead of three years previously, according to him.

On measures related to Foreign Portfolio Investment (FPI) and debt, Jaitley said the authority concerned will review the removal of exposure limit of 20 per cent of FPI’s corporate bond portfolio to a single corporate group (company and related entities) and 50 per cent of any issue of corporate bonds.

The Finance Minister also announced two crucial decisions related to Masala bonds. These are bonds issued outside India but denominated in Indian rupees rather than the local currency.

“There will be exemptions from withholding tax for issuance done in this year, i.e., up to March 31, 2019. Also, there will be removal of restrictions on Indian banks’ market making in Masala bonds, including restrictions on underwriting of such bonds,” he said.

During the meeting, RBI Governor made a detailed presentation on world’s economic scenario and external factors that can impact Indian economy. He said India’s growth rate compared to other economies is very high and its inflation is in a moderate range.

“The government and Finance Ministry’s top priority is to maintain the fiscal deficit and we are trying to maintain it and we are confident we will be able to maintain it,” assured Jaitley.

The country’s fiscal deficit in the first four months of 2018-19 at Rs 5.40 lakh crore has already touched 86.5 per cent of the full year’s target of Rs 6.24 lakh crore.

Economic Affairs Secretary Garg, who was present in the meeting, said no domestic measures on oil were discussed.

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