Current account deficit
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.
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. The equilibrium is
achieved through currency and interest rate adjustment. Currency depreciation
should normally lead to demand for imported goods falling and exports becoming
more competitive and hence bringing trade account to balance. Higher interest
rates should attract more inflows, contain inflation, encourage savings and
eventually lead to current account balance.
The CAD is concern if you do not allow market forces to operate
freely, for socio-political concerns.
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 also been demanding more phones, computers, luxury
automobiles, textile, food etc. not produced locally, besides increasing the
spend on 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.
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 substantially in near future.
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.
Higher interest rate, larger convertibility for INR and
unhindered FDI is inevitable, unless we choose to become a closed economy
again. A large majority of our businesses are absolutely unprepared for this
eventuality. So are our politicians who would not like to lose control over
economy.
Consequently, notwithstanding small 2-4year period of exuberance
in between, longer term structural imbalances should continue to prevail and so
do CAD and weaker INR…..to continue on Monday
Also read:
Thought for the day
“Women and cats will do as they please, and men and dogs should relax and get used to the idea.”
- - Robert A. Heinlein (1907-1988)
Word of the day
Quincunx (n)
An arrangement of five objects in a square or rectangle, one at each corner and one in the middle.
(Source: Dictionary.com)
Shri Nārada Uvāca
Former PM Rajiv Gandhi discovered the huge (85%) leakage in social sector spending 27years ago. The government is claiming that it is making effort to plug it through DBT and touting this claim as big achievement.
Anyone expecting a faster action by government on anything else should relax and watch TV commercials.
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