On Way Out, PC Eases Measures to Rein in CAD
Outgoing finance minister P Chidambaram, who drew up a comprehensive framework – including curbs on gold imports and schemes to raise foreign exchange – to rein in the current account deficit (CAD), ensured that some of the stringent measures were relaxed before he checked out of North Block. There had been expectations that measures might be rolled back after the dramatic improvement in the CAD, expected to have come in at 2% of GDP in FY14 compared with a record 4.8% in the year before. Chidambaram also approved the relaxation of the 80-20 scheme. This stipulates that 20% of all gold imported should be exported. Last week, RBI said star and premium trading houses would qualify for the scheme, a move that the trade said would ease the availability of the metal. With the spectre of high CAD having receded and the rupee stable, Chidambaram had also pushed for restoring the overseas individual investment limit to $200,000, which had been slashed to $50,000, and normalcy in the currency derivatives market.
PC was particularly keen that star trading houses along with premium trading houses be allowed to import gold when he reviewed curbs on April 30.
The government had repeatedly been getting representations from industry and the commerce department for lifting curbs on imports of the metal because of the impact on gems and jewellery, India’s second biggest export, which fell 5.2% in 2013-14 to $41.1 billion. The demand for relaxation had escalated after it became evident that the government’s strategy had succeeded in bringing down CAD.
A vulnerable external sector on account of high CAD triggered a sharp depreciation in the rupee after the US Federal Reserve chairman at the time spoke of winding down its stimulus programme. Capital fled emerging markets. Wary investors pulled out investments over fears that India would not be able to fund its CAD and the currency plunged to nearly 69 per dollar by end August. The government then went into fire-fighting mode with measures that included curbs on the import of gold and steps to shore up dollar reserves.