India has decided to curb the import of “non-essential items” and take further measures to boost exports as its seeks to reduce its widening current account deficit and shore up its rapidly depreciating currency, the rupee.
The plan was announced after Narendra Modi, the prime minister, met top government officials, as well as the central bank governor, Urjit Patel, in an effort to shore up public confidence after a turbulent week that saw the rupee slide to an all-time low of 72.9 to the US dollar.
India announced last week that its gross domestic product grew 8.2 per cent from April to June, its fastest pace in two years. The economy’s accelerating clip is a source of pride for a government that revels in the country’s status as the “world’s fastest-growing large economy”.
However, the recent weeks have seen the rupee coming under persistent pressure, amid a widening re-assessment of emerging market risk. That prompted Mr Modi to announce a high-level meeting to take stock of India’s economic situation and initiate steps to restore confidence.
After the meeting on Friday night, Arun Jaitley, the finance minister, said the decision to curb “non-essential imports” was one of broad policy, and that the exact list of items to be targeted would be drawn up by the relevant ministries.
However, Mr Jaitley said the import curbs would be compliant with India’s World Trade Organization commitments, though he did not specify
Any move by New Delhi to further impede access to its domestic market to imports is likely to upset its key trading partners, who already complain of India’s high import tariffs, compared with other countries, and persistent non-tariff barriers.
During a meeting between Mike Pompeo, the US secretary of state, and his Indian counterpart, Sushma Swaraj, in New Delhi last week, US frustration with India’s relatively closed market figured high on the agenda, with US officials expressing “longstanding concern” over the issue.
However, Mr Modi, who in opposition had declared that the strength of a country’s currency reflected the strength of its leadership, is under mounting political pressure to bring a halt to the depreciation of the currency, which has fallen around 14 per cent against the dollar this year.
The weakness of currency, coupled with rising global petroleum prices, has led to a sharp surge in domestic fuel prices in a country that depends on imports for nearly 80 per cent of its energy needs. On Monday, opposition parties held large protests against the surge of fuel prices, sensing the ruling party’s potential vulnerability on the issue in a sensitive pre-election year.
Until now, Mr Modi’s government has played down concern over the rupee, depicting its weakness as a result of global economic factors beyond New Delhi’s control, including the strengthening of the dollar, the woes of Turkey and Argentina and the spectre of a US-China trade war.
But economists say that India’s widening currency account deficit is a cause of big concern. India announced last week that its current account deficit widened to $15.8bn, or 2.4 per cent of GDP, during the April-to-June quarter.
Besides curbing imports, Mr Jaitley announced other measures to make foreign portfolio investment in India more appealing, including relaxing prescriptive exposure limits. The government will also review mandatory hedging requirements for infrastructure loans.