NEW DELHI India's current account deficit is on track to reach 3.5 percent of GDP in the fiscal year ending in March, its worst in at least eight years, because of a widening trade shortfall, a top government official said on Thursday.
Exports are struggling to maintain the growth rate seen between April and September, because of sluggish demand from the United States and Europe and outlook remains difficult.
"There is still a shroud of uncertainty as to whether Europe is out of the woods yet or not," Trade Secretary Rahul Khullar told reporters.
"Fiscal year 2012/13 is going to be tough," he said, but ruled out any fiscal stimulus to support the exporters, citing the government's strained finances.
The deterioration in the current account deficit could pile pressure on the rupee, which fell nearly 16 percent against the U.S. dollar in 2011 before recovering strongly this year, making it more reliant on volatile capital flows to fund the gap.
The current account deficit was 2.6 percent of gross domestic product in the previous fiscal year.
Merchandise exports, which contribute about a fifth to India's economy, provisionally grew an annual 10.1 percent to $25.4 billion in January.
New Delhi is on track to achieve its 2011/12 export target of $300 billion having already reached nearly 81 percent, compared with $246 billion in the previous year.
Imports continue to outpace exports. The January import bill rose 20.3 percent on year to $40.1 billion, resulting in a trade deficit of $14.7 billion for the month.
Khullar, who will take over as India's new EU ambassador shortly, projected the full-year trade gap to touch $160 billion, higher than his earlier estimate of about $150 billion. The shortfall last year was $104 billion.
A 7 percent appreciation in the rupee's value against the U.S. dollar since the end of December should help bring down the import bill and help lower the trade gap in the next two months, he said.
The rupee has rebounded on the back of strong capital inflows and measures taken by the central bank to stabilize the exchange rate.
Foreign institutional investors have moved $6.6 billion into Indian shares and debt since the end of 2011, data from the Securities and Exchange Board of India showed.
(Writing by Rajesh Kumar Singh; Editing by Ranjit Gangadharan)
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