Finance Minister Arun Jaitley on Friday briefed the media after a high-level meeting, saying the government had decided on five steps to contain the Current Account Deficit woes. CAD had widened to 2.4% of GDP in the first quarter of 2018-19.
The Finance Minister conceded that external factors such as policies adopted by the US, trade war and crude oil prices were impacting economies like India, despite "strong fundamentals".
He observed that "there are some issues on which immediate action is needed," while announcing a 5-point plan to increase inflow of foreign funds and check the CAD.
Some of the steps are as follows:
One of the important decisions is that mandatory hedging condition for infrastructure loans will be reviewed. This relates to external commercial borrowing (ECB).
It has also been decided to permit manufacturing entities to avail ECB facility with minimum maturity of one year, instead of the earlier limit of three years, Jaitley said.
Further, restrictions will be removed 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.
In April, the Reserve Bank had imposed these restrictions on FPIs.
With regards to rupee denominated bonds, popularly known as Masala bonds, Jaitley said it has been decided to do away with the withholding tax on bonds issued till March 2019.
The current withholding tax is 5 per cent. It is to be noted here that no Masala bond has been issued so far in the current fiscal. Jaitley also informed that restrictions on Indian banks on marketing and under writing of masala bonds would be removed. The Finance Minister further said that the government would restrict import of non-essential items and encourage exports.
However, he did not disclose the list of non-essential items which would be subject to import restrictions.
"To address the issue of expanding CAD, the government will take necessary steps to cut down non-essential imports and increase exports. The commodities of which imports will be cut down will be decided after consultations with concerned ministries and will be WTO-compliant," he said.
The restriction would also be imposed private imports of such items, sources said adding that the items have been identified.
To a question on whether NRI bonds would be issued to stem the rupee fall, Jaitley refused to comment.
Large trade deficit and rupee decline against the US dollar are putting pressure on the CAD, and these steps are likely to have a positive impact on the external sector.
Jaitley said the government gives importance to fiscal deficit and expressed hope it would be contained.
Economic Affairs Secretary Subhash Chandra Garg was quoted in a report as explaining that the five measures would definitely have a meaningful impact. "It is difficult to give a specific number. I think it should have an impact of USD 8-10 billion," he said.
The rupee touched an all-time low of 72.91 against the US dollar on September 12 and it closed at 71.84 on Friday.
The domestic currency has declined around 6 per cent since August and touched an all-time low of 72 level this week. Petrol and diesel prices have also touched record highs.
With Agency Inputs