India’s high current account deficit is not sustainable and needs to be curbed to a more sustainable level of 2.5% of gross domestic product, said a top official of the Reserve Bank of India on Friday.
“There is a need to bring the CAD to sustainable levels in the short run and over the medium-term to accelerate efforts towards structural reforms that help boosting our competitiveness, raise growth potential and bring in more stable flows into the economy,” said Deepak Mohanty, executive director at the RBI, in a speech.
The CAD has widened to a record 4.2% of GDP in 2011-12 mainly due to a sharp rise in gold imports and a slowdown in exports growth. For April-June of 2012-13, the CAD narrowed to 3.9%.
Mohanty said that demand for gold needs to be curbed by giving investors more instruments to hedge against inflation such as inflation-indexed bonds. In 2011-12, net gold imports accounted for over 2% of GDP.
Mohanty noted that the size and composition of the CAD has changed over the last decade given increased exposure of the country to the global market. He added that reforms have increased the resilience of the economy but it remains vulnerable to global events. He reiterated that given a slower economic growth, a CAD of 2.5% of GDP is more sustainable.
Mohanty said that the CAD must be financed through more long-term and non-debt flows.