India must deplete forex kitty to cover CAD gap: PM’s adviser

India may have to draw about $9 billion from its foreign exchange reserves to finance the soaring current account deficit this year, C Rangarajan, chairman of the Prime Minister's Economic Advisory Council (PMEAC), said yesterday.

Releasing the PMEAC's economic outlook report for the current fiscal year, Rangarajan pitched for promoting foreign investment and exports to deal with problem in the long run.

He said the potential fiscal deficit is also a concern, and suggested raising domestic oil prices to restrict subsidies to the budgeted target of 4.8 per cent of GDP this fiscal year.

"Controlling the current account deficit remains the main concern at present. On the assumption that the total current account deficit will be $70 billion and net capital inflows that we have estimated (about $61 billion), there will be a drawdown on the reserves of about $9 billion," Rangarajan said.

He also stressed the need for a focused strategy to improve export competitiveness in order to take a positive out of the depreciation of the rupee to bring down the current account deficit. He called for simpler export-related procedures and an increase in domestic coal production.

Other steps suggested by the PMEAC include a reduction in oil subsidies to make them more price-elastic, and proactive implementation of the modified gold deposit scheme.

Rangarajan further stressed the need for a stable, non-reversible policy on foreign investment, as well as early resolution of transfer pricing issues.

He expressed the hope that current account deficit will even fall below $70 billion if the capital inflows picks up.

"Additional focussed steps to increase net capital inflows can result in up to $10-15 billion more inflows during the year, ramping it up to over $75 billion, which, in combination with a restrained current account deficit, would enable some reserve rebuilding," the PMEAC chief said.

The current account deficit was not fully financed in 2011-12 and the country had to run down reserves by $12.8 billion.

India, however, had fully financed its record current account deficit of $88.2 billion last fiscal year and even added $3.8 billion to the foreign exchange reserves.