CAD to remain high for 2 more years: Manmohan Singh

NEW DELHI: India’s current account deficit will remain high for two more years, Prime Minister Manmohan Singh has warned, urging policy makers to take steps to contain it as “quickly as possible”.

CAD will “still be high” in 2013-14 and would reach “comfortable levels in the next two years,” the PM noted in his foreword to the 12th Five-Year Plan document that is still to be officially printed and has been reviewed by ET. Singh expects growth to be 6.5% in 2013-14, a tad faster than the decade-low growth of 5% recorded last year.

“This (the high CAD) poses the challenge of having to ensure financing of a somewhat elevated deficit for two more years,” Singh has said in his foreword submitted to the Planning Commission on May 10. “This must be done through long-term capital flows, including FDI (foreign direct investment),” he said, arguing that though India’s foreign exchange reserves are strong, they cannot be a “source for financing prolonged deficits.” The 12th Plan runs from 2012 to 2017.

Though the official growth and current account deficit numbers for 2012-13 have only come in later weeks, the PM had correctly anticipated in May that the first year of the 12th Plan would see GDP growth of “only 5%” and a current account deficit of about 5% of GDP. Figures released by the RBI last week put the deficit at 4.8% of GDP.

India’s growth aspirations, says the PM, pose a challenge for its democratic system and requires a consensus about the “difficult but necessary policy choices we face” amidst the country’s “vigorously competitive politics.” The path India chooses to take, Singh has said, could also mould the future of democracies around the world.

“This is a challenge for our democratic system. We have to prove that vigorously competitive politics in a democracy can achieve a sufficient consensus to be able to implement the difficult but necessary policy choices we face. This is a national challenge that the entire political and intellectual leadership must come to grips with,” Singh said. The Indian economy must see a very sharp acceleration and return to 9%-plus growth by 2015-16 for the country to achieve its “ambitious” target of growing at 8% through the 12th Plan, the PM has said in his foreword.

The PM’s foreword seems to be a wakeup call for the establishment and clearly reflects his thinking on the challenges ahead for the nation after a horrid start to the 12th plan with the rupee plummeting to record lows.

“One of the problems with our plans in the past has been that they have focused on outlining an attractive future, with not enough focus on what is needed to achieve it and the consequences of failing,” the PM noted, explaining why the 12th Plan has, for the first time, used scenarios to reflect the implications of different types of policy behaviour.