Unsure if June quarter will see 3.6% CAD: Shankar Acharya

The five percent current account deficit (CAD) projection for the full year continues to remain a concern for the economy, said Shankar Acharya of Indian Council for Research on International Economic Relations (ICRIER) to CNBC-TV18. The March quarter CAD came in at 3.6 percent on reduced trade gap, but Shankar Acharya doubted if June quarter deficit will come in as low. 

Speaking on government's efforts to reduce its fiscal deficit and public debt, he said the 50 paise per month hike in deisel price may disappear during elections, which will impact consolidation steps. He said that the government data on the economy does not reflect significant signs of a rebound in growth for the country. Also read: Revision in gas price will boost investor mood: Rangarajan Below is the edited transcript of his interview to CNBC-TV18. Q: Seminal efforts to control oil and fuel subsidy from the government; diesel prices almost getting inline with market prices and now the gas situation has been tackled firmly. Are you happy? Are we well on the road to fuel fiscal consolidation or all this good work could be undone by a huge food security act? A: Unless something new has happened this morning on diesel which I don’t know about. Q: There is nothing new. They have kept to the 50 paise promises. The diesel subsidies are not off but, at least, the promise is being kept. So one hopes that in the next 10 months, will see another 50 paise each month. What do you think about the decision on diesel pricing? A: That was a very important decision taken a few months ago. So far, they have skipped only one month because of one set of state elections. I wish that had not happened. It sets up a precedent because we have some state elections coming up in the later part of the year. So there is a question mark whether during those months, the 50-55 paise increase in diesel will continue. I hope they will. It certainly is very good and we have been helped by the soft oil prices internationally compared to six months ago. In the most recent few weeks, there hasn’t been any further softness on the international oil prices. So one would not be overly optimistic on the gap or subsidy closing from the international side further than what it has already done. On the gas price, it is a very intricate question. Some companies, both public and private would both benefit, energise and incentivise to explore, produce, etc. It is all good as we need energy from all the sources given various gaps that we have. But whether the price that has been finally decided on after consulting and augmenting and whether the cabinet decision is the right one, I am not competent to know. There are a lot of people who feel it is a little high. I am not qualified to judge that. The broad point remains, fundamentally, that our external finances are still fragile. Perhaps it is too stronger a word. But they are under stress and vulnerable. While the quarter ending March, data are perhaps a little lower on the CAD than people were expecting. The big picture remains that for the full year, we are close to 5 percent which people were expecting. It is way above anything that can be sustained. The Prime Minister himself spoke about 2.5 percent as a sustainable level. It is double of that. I don’t know therefore the quarter by the end of June will necessarily get as lower figure as 3.6 percent again. So the commentary in the press now; they are still talking about numbers above 4 percent. We are not in a good position on the CAD particularly given the international situation i.e. the whole discussion about tapering off of the US quantitative easing (QE) program. It was foreshadowed by Bernanke’s remarks a few days ago. Q: How will the rupee pan out from here? When the rupee breached that 60/USD, there was so much panic in the market. There were talks of a balance of payment crisis (BoP) that many economists were also into. Is that just taking it a tad too far or could we be heading that way? On the rupee, what are your views now? A: Predicting a particular value of the rupee is a bit of a mug’s game. When these things change, they change quite swiftly either way. They change for a variety of factors. The broad point is if you go back to something like a year ago, the rupee has weakened substantially since then. It is not surprising as we have been having these large CAD. We have had not that much correction on the fiscal front; there have been a lot of problems on our internal economic performance both in the aggregate and particular sectors. It was there in the infrastructure bottlenecks and there was a policy paralysis. So, we remain vulnerable. That is the big point. Whether you shock coming from externals which is perhaps more likely in the coming few months or internals, monsoon fails or something like that, we are exposed. That remains true. Day to day, the rupee will fluctuate. I am not in a position to tell you whether the rupee will go to 65 or whether it will rebound to 57. It can happen either way. One might see both of those happenings in a fairly short span of time. Broad point is that the external sector is vulnerable. Rupee volatility will continue with a downward bias. When one talks about balance of payment crisis today, remember that we are not in a fixed exchange rate regime. So, the crisis will essentially come through rupee volatility. Whether it is crisis or stress is arguable. But for those companies which have high foreign exchange in next leverage, it will be closer to a crisis. For those that don’t, it won’t. _PAGEBREAK_ Q: What are your thoughts on growth? Are we at last crawling into a better rate above 5 percent or will the pace remain sub-5 percent even in the current year due to uncertainty or the other? A: I would prefer if one could happily say that growth is going to get to above 5 percent; closer to 6 percent in this fiscal year. Certainly, many reputable or senior government spokesmen have claimed and said that. But when looked around for the data one significant piece of data is not seen yet which points to any appreciable rebound. Our very poor growth rate, at present, is 5 percent or lower depending on the annual rate or the quarterly rate. There is nothing either in IIP data or various surveys of businesses or from bank CEOs on what is happening on the ground. There is nothing to my mind which suggests that we have rebound or green shoots in the making. At the end of June we can continue to hope. But if policy remains unchanged and absent, further shocks; something 5 percent plus-minus half is what I would say. Q: From what you say should we glean therefore that we cannot be rest assured on the fiscal front. The government has shown some will but you are not sure of fiscal consolidation. A: I would have been a little more encouraged on the fiscal front if the revenue deficit in the Budget was significantly lower. It is still above 3 percent of GDP as you know as programmed let alone various uncertainties, one. Two, I would be a little more optimistic if the Food Security Bill had not been pushed. We know that it did not go through cabinet for various reasons. But the fact is that it was pushed. The way I would see it is that important parts of government have not learned the kind of situation we are in properly.