Nov. 25, 2010 (The Hindu Business Line) --
K.R. Srivats
New Delhi, Nov. 25
Former Reserve Bank of India (RBI) Governor, Dr Yaga Venugopal Reddy, has voiced qualified concern over the current account deficit (CAD) exceeding 3 per cent of Gross Domestic Product (GDP) in 2010-11 on the back of higher commodity prices and crude oil prices.
“Exceeding 3 per cent is likely now. Suppose a question is asked about how some persons (observers) believe that it will go to 4 per cent and are there any warning signals, I would definitely say no serious warning but careful watching (is required),” Dr Reddy told Business line here.
He was in the Capital for the launch of his book ‘Global Crisis Recession and Uneven Recovery'.
Dr Reddy's concern on CAD assumes added significance in the wake of a recent report from Goldman Sachs (NYSE:GS) that predicted CAD of 4 per cent for India in 2010-11 and even higher 4.3 per cent for 2011-12. Former Chief Economic Advisor to the Finance Ministry, Dr Shankar Acharya, had also in September forecast a record CAD of 4 per cent of GDP or higher for 2010-11.
Stating that India has only “less cushion” to face any oil price shocks at the current level of CAD, Dr Reddy noted that the big risk is the country's oil bill going up, leading to higher CAD.
Dr Reddy said that he entirely agreed with the RBI Governor, Dr D. Subbarao's stance that India should be comfortable if CAD is anywhere near 3 per cent, but not above it.
Capital flows
He, however, did not agree to the views expressed in certain quarters that India's absorptive capacity (on capital flows) is low.
“CAD is not something that is based only on absorptive capacity. Everybody feels you should increase the absorptive capacity. But you should allow the absorptive capacity to increase only up to the level at which rest of the world is willing to finance you,” Dr Reddy said.
In his book, Dr Reddy has mentioned that CAD has accelerated significantly, but also highlighted that India does not have significant macro-economic imbalances which need to be corrected as part of the post crisis programme.
