Our policy makers, regulators, economic commentators and
analysts have all expressed their grave concerns over the swelling current
account deficit (CAD) of India. However, we have not seen any concrete steps to
address the roots of the problem. Most of the efforts seem to be focused on
containing the legal import of gold and attracting more foreign debt so that at
least balance of payment could be maintained. Last week the finance minister
suggested that if Indians could restrain themselves from buying gold for one
year, current account situation will improve dramatically.
Current account measures trade, international income, direct
transfers of capital, and investment income made on assets. A current account
deficit occurs when a country's government, businesses and individuals import
more goods, services and capital than they export.
Theoretically, CAD arising from trade deficit is never a
risk in itself. The excess of imports over exports essentially means that our
economy is doing better than the other economies who import from us.
However, it could pose a serious risk if it becomes structural
and persists for a long period, especially for a deficit emerging market like
India. Consider the following:
(a)
Substantial rise in social sector spending over
past decade has led to unprecedented rise in consumption demand from lower
socio-economic strata. Domestic supply has however not been able match the
demand. Burgeoning middle class has been demanding more phones, computers,
luxury automobiles, textile, food etc. not produced locally, besides leisure
foreign travel. Young demography and rising aspirations have led to ever rising
demand for global education and training as we have failed in constructing
enough global standard institutions. These trends are not likely to change
substantially even if our economic growth persists at current low levels.
(b)
The structure of our exports has changed in past
decade in favor of engineering products and services from predominantly
consumer goods earlier; meaning our exports are now highly correlated to global
growth, which is not likely to improve in near future.
(c)
This structural weakness in trade composition
necessitates higher capital inflows so that at least balance of payment could
be maintained; meaning we have to maintain our interest rates at relatively
elevated level so as to attract higher foreign capital; meaning domestic
investment will continue to suffer and supply constraints will persist for
longer period.
Only serious
structural reforms that attract significant foreign equity capital and other
resources to augment domestic supply could resolve this conundrum. The current
political structure does not seem to be conducive for such reforms.
Insofar as gold is
concerned – the government and RBI need to evaluate, is buying gold worse than
splurging on fashion textiles brands, accessories, perfumes, luxury cars and
boats, studying in third grade central European universities and holidaying
abroad twice a year?
Also read:
Thought for the day
“A grievance is most poignant when almost redressed.”
- Eric Hoffer (1902-1983)
Word of the day
Diglossia (n):
The widespread existence within a society of sharply divergent formal and informal varieties of a language
(Source: Dictionary.com)
Shri Nārada Uvāca
In spite of everything BJP and Congress together may still get 35-40% of the votes cast in next elections.
Any front, alliance, strategy that talks about keeping them out of government is undemocratic, undesirable, and unsustainable.
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