Even if CAD softens, financing it is huge issue: Barclays

This year India’s current account deficit (CAD) may soften to USD 68 billion, says Siddhartha Sanyal, chief economist-India, Barclays. Continuing his upbeat tone, he added that the number may even go as low as USD 57 billion.

“The reason why we are maintaining a bias more towards a favourable side because we are talking about a very modest improvement in non-oil, non-gold segment, a bit of improvement in the gold segment and some steady uptick in services exports and remittances,” he told CNBC-TV18 in an interview. For year ended March, CAD deficit widened to USD 87.8 billion, or 4.8 percent of GDP, from USD 78.2 billion in 2011-2012, or 4.2 percent of GDP. However, unlike PMEAC chairman C Rangarajan, Sanyal feels given the huge FII outflows recently seen from fixed income and equities, financing CAD would be a huge problem. “The big message here is funding concerns will not go away in this kind of a scenario, but the kind of extreme pessimism we have been having like an unfunded gap of USD 25-30 billion, that expectation should be toned down,” he added. Meanwhile, he expects Q1FY14 GDP growth to be at 4.9 percent. Below is the edited transcript of Siddhartha Sanyal’s interview with CNBC-TV18 Q: You have come out with a projection that the current account deficit (CAD) might actually be better than that USD 70 billion that is expected for FY14. What is your CAD target for FY14 and what leads you to this optimistic scenario? A: We do set a base case of USD 68 billion in this particular year and we have given optimistic and pessimistic scenario as well. We have mentioned a bias towards softer CAD number. Our sense is that though our base line scenario is pegged at around USD 68 billion for the year, the number can be as low as USD 57 billion. That is also not ruled out. The reason why we are maintaining a bias more towards a favourable side compared to our base line scenario is the base line scenario is vest on very conservative set of assumptions. We are talking about a very modest improvement in the non-oil, non-gold segment, a bit of improvement in the gold segment and some steady uptick in services exports and remittances. But given that there is a significant improvement in the western economies and there is significant hit in case of dollar-INR rates, you can actually be surprised favorably. Q: The problem is that now we are discussing whether this will be funded adequately because we have seen the kind of Foreign Institutional Investor (FII) outflows that we have started to see starting with debt market, now we have seen some part of that coming into the equity market. Last year was alright because we kept having big chunky FII inflows. In terms of financing would that be a concern? A: I agree with you. Financing in this particular year remains a much bigger problem. Last year we had a CAD of around USD 88 billion, still we could fund it pretty easily. We had actually a few billion dollars of surplus as well. This year even if it comes to the range of USD 57-68 billion that concern will not possibly go away. But even if we get some kind of a positive scenario then India will be in a good position to fund at least most of the CAD. The big message here is the funding concerns will not go away in this kind of a scenario, but the kind of extreme pessimism we have been having like an unfunded gap of USD 25-30 billion, that kind of expectation should be toned down. _PAGEBREAK_ Q: What is your estimate on fuel subsidy for FY14? A: We still have a number of around Rs 70,000 crore from the government side and under recovery roughly double of that. We are still okay with this particular set of numbers. But if oil prices throw further substantial upside surprises then we need to revisit. But as of now close to half of the year gone we are still pretty comfortable with that. Q: At Barclays you expect 61/USD on currency in 6-12 months, that looks like a bit of a contra call right now because the kind of numbers that I am reading may be 68-70/USD what do you think will lead to this move towards 61/USD? A: The issue here is we think the market is ignoring at the moment the improvement in CAD. The government is talking about a USD 70 billion kind of CAD, but we think there can be a substantial positive surprise there. If that number comes true and the moment we come close to USD 60 billion, the funding gap becomes much narrower. In that kind of a situation, extreme pessimism of INR will possibly start coming down. In that kind of a situation, few months down the line we don't really expect any quick reversal of the INR trajectory as of now because the market sentiment at the moment is pretty negative. We do not really rule out a possibility of 61/USD. However it will depend a lot on what kind of policy measures the government and the RBI is taking going ahead in the next few months. Our sense is that at this juncture, it is most important to ensure that we get some kind of chunky foreign capital flows into the country. If government policies are here towards that, the chances of a 61/USD or somewhat in that range, becomes very strong. Q: We have that GDP figure coming on Friday, what are you estimating in terms of the today figure as well as the breakup between the three sectors? A: We will talk about a 4.9 percent number for the full quarter. Now in this particular quarter, we more or less know that the industrial number is not very encouraging. For agriculture, we are thinking of a growth rate of something around 3 percent on the basis of decent sowing and whatever is the rabi production harvest around that particular quarter. The unknown factor in this quarter is services and there what role the government services play. It looks like in the month of June there has been pretty decent spending on the part of the government so we are hoping a somewhat better number. Having said that, we want to make it pretty clear we are not really expecting some big turnaround in GDP going ahead in the next few quarters so pretty sluggish number of 5.3 percent for the full year.