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Millennium Post

Current account crisis is govt’s own making

Indian economy has been witnessing constant tremors from current account deficit (CAD) since 2010-2011. The biggest shock came at a highly alarming intensity at 6.7 per cent of GDP in the last quarter of 2012. The figure was officially announced in the last week of March 2013. The epicenter of the tremors  is of course New Delhi, the seat of new India’s political power and economic policy-making authorities such as the Prime Minister’s Office (PMO), finance ministry and the department of economic affairs (DAE), planning commission and the commerce ministry. No economy can survive unharmed with a constant CAD situation at over three per cent per annum for successive years. CAD, like diabetes, is a disease of a country’s metabolic economic disorder. Uncontrolled, it affects every principal organ of economy. Its plays havoc with domestic currency exchange rate, forcing its steady devaluation. It forces higher foreign borrowings and reduces repayment ability, in turn affecting sovereign debt rating, and cost of foreign currency borrowing and foreign direct and indirect investments in domestic economy. Imports become increasingly expensive in terms of domestic currency. High cost imports overheat those highly import-dependent economies, of which India is one. Economy becomes weaker and weaker as it is forced to survive increasingly on costly foreign commercial borrowings.

Unfortunately, India’s current CAD crisis is entirely its own making. The poor country, where 40 per cent of the population lives on less than Rs 100 each per day, is splurging borrowed hard currencies in importing luxuries and on entertainments. It is the world’s largest consumer of imported gold, scotch whiskey, perfumes and deodorants. The rich are going for the best and most expensive global brands. The low income group too is highly happy with increasing access to imported cheap Chinese junks. Millions of dollars are wasted in annual entertainment events such as IPL of Cricket, film shooting abroad, luxury tours and ocean cruises across the world among others. All these would have been okay if India earned enough hard currencies from exports and received large repatriation of corporate income, especially from its banks and companies abroad which used dollars from RBI for overseas acquisitions and expansions. Even China, which is sitting on a pile of over $ 4.5-trillion in hard currency hoard, does not allow the wastage of its foreign exchange by its people in such a manner. Almost all FDIs in China carry export obligations or import substitution commitments. India has no such policy for FDI. Since the country’s so-called economic reform in 1991-1992, India’s gross FDI inflow over the last two decades is less than its trade deficit in a single year, 2012-2013. At this rate, this country is heading for a disaster for sure. Its policy-makers and political administrators are only to blame.

The poor or rich, every Indian has the right to live well, send their less intelligent children to Australia, the UK, New Zealand, Canada, etc often for low quality graduate and post-graduate studies or enjoy honeymoon at Hawaii as long as they can afford them.  But, when we talk about affordability, we generally talk in terms our Rupee resources. We ignore the aspect of hard currency or internationally tradable currencies. All import bills and overseas expenditure are paid in hard currencies. If living well means expenditure in lots of hard currencies, Indians must earn them. They can’t indulge in high living eternally on borrowed hard currencies. India must earn enough hard currencies to pay for its imports and be treated well internationally for its high creditworthiness. That is the point. Otherwise, the country is in deep trouble. India’s economy needs to be made export-oriented which it has failed to become mainly because of the government’s policy lapses and wrong reform priorities. At the end of the day, the country’s foreign income, long-term direct foreign fund flow into industry and businesses, foreign borrowing and foreign exchange reserves will act as barometers of its economic health.

It is not that India’s policymakers are unaware of these factors. But, for reasons best known to them, they have been slow on policy measures forcing export orientation and import substitution. The local companies such as Bharat Electronics Limited, Indian Telephone Industries, Voltas, Godrej, Allwyn, Kelvinator, Sonodyne, etc. had much bigger presence in India through the 1960s, ‘70s and the ‘80s than Samsung and LG had then in South Korea. Today, thanks to the government policies, foreign brands have totally captured the country’s vast consumer market. Old Indian brands have become vanishing species. But, being aware of the decline and eventual surrender of India’s consumer sector to imported foreign brands is not the same as taking policy measures at the government level to reverse the trend. Many consider any talk on the need for import substitution and export orientation for long-term economic sustainability and financial security as totally unfashionable. The government is still banking on FDI and FII, willing to give them any amount of concessions and incentives, to bail economy out of the CAD pressure. But, it does not normally work that way. High CAD pressure, as also continuously high fiscal deficits, scares away FDI and FII funds.

However, Chakravarthy Rangarajan, chairman of the prime minister’s economic advisory council, does not seem to worry about the record 3rd quarter CAD. But, contemporary economists disagree. They find the CAD trend unacceptable and feel that only a strong policy intervention at the highest level of the government can slowly help reverse the situation.  CAD is more pernicious to economy than fiscal deficit. While budgetary discipline is capable of controlling fiscal deficit, beyond a point CAD is more prone to external manipulation. (IPA)
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