India is staring at an almost impassable current account deficit crevasse for the third quarter of FY13 as sources in the finance ministry peg the deficit at close to 6 percent. In an attempt to stem the deficit expected to be at 6 percent, the government is gearing up to initiate more measures after the limited impact of curtailing gold imports, reports CNBC-TV18’s Aakansha Sethi.
The move to curtail gold imports was not as effective as expected. Sources in the finance ministry indicate that the current account deficit (CAD) is likely to be at 6 percent. Though the final estimate is to be announced on Thursday, it stands confirmed that the CAD levels will have the government worried.
Though there is little the ministry can do in the short-term, sources suggest that the government is actively considering a cut in withholding tax on rupee-denominated debt to 5 percent. Earlier, the ministry had reduced the tax on foreign borrowings to 5 percent from 20 percent.
As the withholding tax paid comes to about Rs 15 crore, the government is concerned how this is going to help. But under the government’s active consideration, the finance minister has already announced fungibility of FII sub-limits. These could be raised up by up to USD 5 billion in this fiscal. Also it is unlikely that external commercial borrowing (ECB) limits will be raised because the finance ministry does not want to allow too much of dollar borrowing into the country without proper hedging.
The finance ministry is also looking at opening up foreign direct investment (FDI) further. A committee under the DEA secretary has been setup and is keen to hike FDI in defence and news to 49 percent. Considering the impact a surge in the CAD is going to have on inflation and the problems with financing the deficit, the CAD is going to be a large source of worry for the government.