The Union Government on September 14, 2018 announced a host of measures to check the rising Current Account Deficit (CAD) and the fall in rupee.
The decisions were taken at a meeting chaired by Prime Minister Narendra Modi in New Delhi to review the state of the economy. During the meeting, PM Modi was briefed by RBI Governor Urjit Patel and officials of the Finance Ministry.
Speaking after the meeting, Finance Minister Arun Jaitley said that several issues were discussed during the meeting and decision on them will be taken in the next few days.
Mainly, he said that the government has decided to cut non-essential imports and increase exports. “We felt that there is a need to control the current account deficit and bring more dollars into the country. We have to meet the challenge,” he said.
The CAD widened to 2.4 per cent of the country's gross domestic product (GDP) in the first quarter of 2018-19 from 1.9 per cent in the fourth quarter of 2017-18.
What is CAD?
The current account deficit is a measurement of a country's trade where the value of the goods and services it imports exceeds the value of the goods and services it exports.
Why is CAD rising?
The main reason for the rise in CAD is because of the rising interest rates in the US, high crude oil prices and its impact on emerging markets and the trade war between the US and China.
Impact of the rise
The rise in trade deficit has an adverse impact on the Indian rupee. The rupee has lost 12 per cent against the US currency since January, making it Asia’s worst-performing currency.
The steps to be taken by the government to attract dollar inflows into the country include:
• Reviewing of mandatory hedging condition for infrastructure loans
• To permit manufacturing sector entities to avail of External Commercial Borrowing (ECBs) up to $50 million with minimum maturity of one year, instead of the earlier limit of three years.
• Removing restrictions with respect to FPI exposure limit of 20 per cent in corporate bond portfolio to a single corporate group or company or entity and 50 per cent of any issue of corporate bond
• Removal of withholding tax on rupee-denominated bonds known as Masala bonds issued till March 2019
• Removing restrictions on Indian banks, market making in masala bonds, including restrictions on underwriting of masala bonds.
• Relaxation for Foreign Portfolio Investment (FPI) and curbs on non-essential imports.
Objective of the measures
The measures are aimed at increasing capital flows into the country to finance the widening CAD. The measures are expected to increase dollar inflows to the tune of $8-10 billion into the country.
The commodities on which imports will be cut down will be decided after consultations with concerned ministries.
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