CAD pains: Import curbs likely.

After raising the customs duty on gold, the government may consider imposing curbs on imports of some other commodities to keep the widening current account deficit (CAD) in check.

“Curtail CAD to the extent feasible because otherwise, India may face problems in the years to come. If we cross a CAD of 3.5 per cent (of gross domestic product next financial year), we need to see which imports can be curbed without adversely impacting the growth," Finance Secretary R S Gujral said after a Budget interaction organised by the Confederation of Indian Industry.

Despite protests by bullion traders against the increase in basic customs duty on gold imports, Gujral justified the decision, saying it was done to channelise domestic savings to more productive sectors.

The Budget proposed to double the customs duty on gold to four per cent. Finance Minister Pranab Mukherjee said in his Budget speech one of the primary drivers of the CAD was the almost 50 per cent growth in imports of gold and other precious metals in the first three quarters of the year. CAD stood at 2.9 per cent in 2010-11 and is expected to be around 3.6 per cent this year. In the first half of 2011-12, CAD was at 3.6 per cent, slightly lower than 3.7 per cent a year ago.

However, CAD is estimated to come down to three per cent next financial year by the Prime Minister’s Economic Advisory Council. It pegs gold imports at $58 billion for 2011-12, against $33 billion a year ago. However, the high-powered think tank expects gold imports to come down to $38 billion in 2012-13, as basic macroeconomic conditions stabilise.

“It’s difficult for the economy to sustain high twin deficit, CAD and fiscal deficit. If commodity prices remain volatile and the rupee depreciates, then CAD may overshoot expectations. Anything which is a consumer good and does not have a productive value may face curbs," said Devendra Kumar Pant, director, Fitch Ratings.

Gujral said the telecom department had indicated to the finance ministry that the process of spectrum auction would be completed by January or February. This could force the government to front-load its borrowings, as over Rs 40,000 crore is budgeted from the sale of spectrum.

“The Supreme Court has asked it (Department of Telecommunications or DoT) to complete the process in three to four months. DoT has said it is not feasible. But the department is clear it would be able to complete the process by January-February," Gujral said.

He said spectrum, apart from that for 2G services, was available with the information & broadcasting and defence ministries. It was likely to be freed during the course of the year, he added.

The finance ministry and the Reserve Bank of India are likely to meet on Friday or Monday to decide the borrowing calendar for the first half of the next year.

Pant said since a major chunk of non-tax revenues was expected in the later part of the year, borrowing could be front-loaded. He added it would also depend upon tax collections in the first part of the year. “If revenue collections fall short, then naturally, it (the government) will be front-loading," he said, adding it had front-loaded market borrowings in the past.

The Supreme Court on February 2 cancelled 122 telecom licences awarded under the then telecom minister A Raja. It asked the government to conduct fresh auctions in four months.

The government will go for 11.76 per cent higher market borrowings at estimated Rs 5.69 lakh crore in 2012-13, against Rs 5.10 lakh crore in revised estimates for this financial year.

Source : smartinvestor.in