The situation on the current account deficit (CAD) was not so grim thanks to the drop in imports. During April-June, the CAD was at $16.4 billion compared with $21.7 billion a quarter earlier and $17.4 billion during the first quarter of 2011-12. However, as a proportion to GDP, the CAD widened to 3.9% against 3.8% in the corresponding quarter of 2011.
While the Prime Minister's Economic Advisory Council (PMEAC) has projected the CAD at 3.6% of GDP during 2012-13 compared with 4.2% last year, some analysts see it at around 3.4% if the rupee strengthens further and the trade gap narrows.
During the first quarter, exports fell 2.6% while imports posted a sharper decline of 3.6%, helping the trade deficit to narrow to $42.5 billion from $44.9 billion a year earlier. As a percentage of GDP, the trade deficit widened to 10% during the quarter compared with 9.8% in Q1 of the previous year.
Capital flows slowed after the Budget, with its retrospective tax proposals scaring off foreign investors. Inflows of foreign direct investment (FDI) to India during Q1 were at $6.2 billion, higher than the previous quarter's level of $4.2 billion but lower than the previous years level of $12.4 billion. Net inflows from NRI deposits surged to $6.6 billion, reflecting the deregulation of interest rates on rupee deposits and increase in the ceiling of foreign currency deposits.
External commercial borrowings were at $0.8 billion during Q1, moderating from $3 billion in Q1 of 2011-12, as there was a decline in disbursements and increase in the repayments. However, net inflows under short-term trade credits witnessed a surge during the period and stood at $5.4 billion compared with $3.1 billion during the same period of 2011-12.
Despite moderation in the CAD, net accretion to foreign exchange reserves was just $0.5 billion during Q1 of 2012-13, lower than the $5.4 billion during the corresponding period of the previous year mainly on account of a sharp decline in capital inflows. In nominal terms, foreign exchange reserves declined by $4.7 billion during the quarter, reflecting appreciation of the dollar against major international currencies during the quarter.
The fiscal deficit in the first five months works out to 65.7% of the Budget target for 2012-13 and 3.35% of GDP, government data showed. Though the government has not yet revised upward its deficit or market borrowing targets as yet, economists say it may touch 6% going by the surge in fuel subsidies, sluggish revenue and uncertainty over the disinvestment programme.
It's not a surprise that the macro data looks challenging. Going forward, our sense is it will take quite a while at least six months for these parameters to improve, said Samiran Chakraborty, head of research for South Asia at Standard Chartered Bank. Fiscal deficit is going to touch 5.8% in 2012-13. It is very unlikely that it could be reined in within 5.1% that's beyond question," he said.
Industrial growth is likely to remain slow as the infrastructure sector grew by just 2.1% in August due to a decline in the output of cement, crude oil, gas and fertilisers. The outlook for the remaining months also remains grim as many mega projects were halted due to a host of reasons including lack of forest clearances, land acquisition problems and, of course, high borrowing costs.
Even though the government has announced a raft of steps like hiking the price of diesel and allowing FDI in multi-brand retail and aviation, economists are not optimistic of a quick turnaround in the economy as the government and central bank are hamstrung in rolling out fiscal or monetary stimulus to arrest the slowdown.
On Friday, Fitch Ratings lowered India's growth forecast by half a percentage point to 6%, close on the heels of S&P's move to pare its forecast sharply to 5.5% for 2012-13. The forecast by the two agencies was lower than 6.5% projected by the Reserve Bank of India and the 6.7% estimated by the PMEAC.
"A number of quarters of weak investment, in turn, may be starting to affect the economy's supply capacity, pointing to a weaker growth outlook. The authorities' ability to respond with looser policy is constrained by India's high inflation, fiscal deficit and public debt," Fitch said in its report.