With efficacy of recent steps by New Delhi to curb gold import yet to be tested, the Reserve Bank of India (RBI) said on Tuesday that the country would have to increase exports to deal with its high current account deficit.
"Recently, import duty on gold has been raised and bank finance against pledge of gold has been restricted. The efficacy of these measures, however, is yet to be tested," RBI executive director Deepak Mohanty said in a paper presented at the SAARCFINANCE Group Meeting in Islamabad.
"Notwithstanding these measures for a fast growing economy like ours, import demand is bound to be high. Hence, we have to step up exports to narrow the trade gap," Mr Mohanty added.
He said, however, that in a phase of sluggish global economy, it is difficult to push up exports.
"Nevertheless, initiatives have been taken to diversify trade towards emerging markets. On balance, however, the current account deficit remains high thus needs to be financed through capital inflows," he said.
Huge gold import is one of the reasons for India's high current account deficit that touched 6.7 per cent of its gross domestic product (GDP) in the October-December quarter.
Mr Mohanty said that as capital inflows to India have turned volatile, "Financing of our large current account deficit has become a challenge."
Policy measures taken by India to encourage capital inflows include rationalisation of norms related to foreign institutional investors (FII) and permitting foreign direct investment (FDI) in multi-brand retail.
Mr Mohanty further said that while national authorities are taking steps, international financial institutions (IFIs) like the IMF need to be more proactive to suggest ways to limit the spill-over and prompt actions to be taken to arrest further deterioration in global economic condition.
He said speedy implementation of a complete banking union in the euro area with an integrated regulatory and supervisory structure assumes importance.
Mr Mohanty said that over the medium-term, efforts made to diversify trade towards emerging market and developing economies should be stepped up.
"In this context, there is greater scope for trade and financial integration in the SAARC region which will be mutually beneficial," the RBI official added.
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