Current Account Deficit to be 1.5 pc of GDP, not 2.5 pc: EAC

New Delhi, Jan 11 (UNI) The Economic Advisory Council to the Prime Minister today allayed apprehensions of a runaway current account deficit (CAD) of 2.5 per cent (of GDP) during the current fiscal, asserting that the CAD is likely to be not more than 1.5 per cent.

According to the balance of payment (BoP) projections, presented to the Prime Minister Manmohan Singh today, 2006-07 is expected to witness a net FDI flow of 9 billion dollars and the year-end accretion to reserves is estimated at 22.6 billion dollars.

The EAC report said the BoP data indicated a CAD of 11.7 billion dollars in the first half-year. A mechanical extrapolation of this, after adjusting for seasonal variation, would result in a full year CAD of around 20 billion dollars or 2.5 per cent of the expected GDP (900 billion dollars).

However, historical experience with data showed that such mechanical extrapolations would be off-target as the provisional figures were substantially adjusted downwards in later revisions.

Applying the correction accordingly, the EAC estimated the CAD for the first half-year at 6.5 billion dollars, and for the full year at 13.4 billion dollars which would translate to 1.5 per cent of the projected GDP.

The EAC also noted that the substantial downward revisions which had become a common feature were disquieting and eroded the credibility of data.

Another heartening feature in the BoP outlook is that for the first time in several years, net FDI is projected to be larger than portfolio capital flow. Net FDI this year will be around 9 billion dollars, up from 4.7 billion dollars last year. The net figure results from in-bound FDI of around 12 billion dollars and out-bound FDI of 3 billion dollars.

With the increase in exports and imports, the ratio of total trade to GDP, signifying the extent of global integration of our economy, will be 35.9 per cent this year, up from 32.8 per cent last year. If we also include software exports, as indeed we should, the ratio this year will go up to 39.0 per cent.

UNI