Budget 2015: Use cheap crude to fix fiscal, trade deficits, says HR Khan, RBI deputy governor

MUMBAI: Three days ahead of the Budget, the Reserve Bank of India (RBI) has told the government that the fall in international crude price is too valuable an opportunity to miss in terms of getting fiscal deficit and trade deficit in place. Listing all previous crises - including the Asian financial crisis, the dotcom bust, the subprime crisis, the Greek sovereign default and the US Fed taper - RBI deputy governor H R Khan said that India was hurt not because history repeated itself but because we have not learnt from history.

Quoting former governor D Subbarao on India's failure to learn from history, Khan said, "It is imperative for EMDEs like India to internalize past crises and take effective steps to safeguard against future shocks."

Speaking at a conference organized by Symbiosis Centre for Management Studies, Pune, Khan said that current account deficit (CAD) for FY15 was expected to be lower than last year's 1.7% because of the steep fall in crude prices. "India has witnessed a net inflow of about $25 billion in the form of foreign direct investment and about $36 billion as portfolio flows, as against about $21 billion and outflows of $1 billion respectively in the corresponding period of the last year. During 2014-15, capital flows would be more than adequate to finance CAD," he said.

He, however, warned that the good times may not last. "As economic slack diminishes with recovery in the domestic economy, the upturn in the investment cycle will require higher non-oil, non-gold imports. Easing of norms for gold imports could lead to a widening of CAD in 2014-15. Even though crude prices are projected to stay low, the re-emergence of geopolitical risks, particularly in Middle East and Ukraine, may keep oil prices relatively firm and, thus, may have implications for India's oil import bill. This may pose upward risks to India's CAD."

Khan said that transmission of impact of global crisis is accentuated with domestic vulnerabilities. "The impact of May 2013 announcement of the Fed Reserve was more pronounced due to domestic vulnerabilities. The CAD had increased from about 1% of GDP in '06 to nearly 5% in '13, real exchange rate had appreciated, fiscal deficit and inflation had gone up. The economy had slowed down although the level of foreign reserves was considered comfortable," he said.