Consider the broader economic scenario, the GDP growth has slid from 9.3% in FY11 to 5% in FY13 and is forecast by some brokerages to slip below 4.5% this year. Although the targets is to rein in CAD at $70 billion (3.7% of GDP) in FY14, it will be more due to subdued non-oil imports than recovery in exports. The problem is how to finance the CAD given the FII outflows.
The other problem is that debt-to-GDP ratio has climbed to 21.2% in FY13 from 17.5% in just two years with a sharp rise in the ratio of short-term debt to FX reserves from 42.3% to 59% between FY11 and FY13. Whats scary is the extent of depletion of FX reservesfrom $309.72 billion in pre-crisis year of FY08 to $277.72 billion in August. As a result, the number of months that our FX reserves could cover imports has come down to 7 from 9.5 in FY11. To mitigate external vulnerability, the government has to do a lot more spade work in coming days. Trying to curb imports by duty hikes alone cant help.