The bigger picture
As India eyes a $5 trillion economy, attention must be drawn towards its surging CAD and trade deficit, as well as a devalued currency
With galloping annual trade deficit, high current account deficit, falling international exchange value of rupee and rising consumer prices, the government's target of making India a $5-trillion economy in five years looks highly ambitious. Government economists, it seems, have created a wrong impression before the prime minister and the finance minister about the strong potential of Indian economy hitting a $5-trillion mark by 2025, from the present level of $2.75 trillion. A simplistic calculation says it is possible if the GDP grows at eight per cent annually in the coming years.
However, it missed out the most important factor: relating the possible exchange value of Rupee vis-à-vis US$ in the next five years. Probably, the government has assumed that Rupee will remain highly stable during the period. One wished the government and its economists explained the logic behind such an important assumption in the face of the country's growing trade (BOT) deficits, current account deficits (CAD), increasing foreign borrowing, low core sector growth and also falling domestic purchasing power of Rupee as reflected in the consumer price index (CPI).
Theoretically speaking, at the exchange rate of eight rupees for a US$, as it existed in the early 1980s, the present size of the Indian economy would have been worth $20 trillion. In 1947, Re 1 was nearly equal to a US$. From 1966 to 1980, Rupee remained largely stable. However, the global economic problems of the early 1980s followed by the energy crisis of 1991 during which the prices of oil and gold surged, Rupee had to be devalued again, to Rs 17/$ by 1991 in the midst of an economic crisis that forced India to take up a major IMF-World Bank prompted economic reform.
Unfortunately, Indian Rupee has since been constantly losing its exchange value, mostly in the face of BOT and CAD. From Rs 19.64 to a dollar in March 1991, the Rupee went to 31.23 for a USD a year later. This translated into a drop of a whopping 59 per cent. The consequence was that the next three years saw the trade deficit shrivel to barely one-sixth of its size and the non-oil trade balance moved from a deficit to a massive surplus. The Indian currency had hit its all-time intra-day low of 74.45 against the US dollar on October 11, 2018, making it one of Asia's worst performers.
The government's ambitious GDP target in US$ terms for 2025 missed to note and explain reasons behind the country's all-time record trade deficit of $176 billion in 2018-19. Neither the economic survey nor the 2019-20 budget provides a dependable road map for future BOT deficits and CAD. The past accounts are depressing. They explain why the GDP growth is not reflecting enough on the size of India's economy in dollar terms. For the full fiscal year 2013-14, before the NDA government came to power, the country's balance of payments stood at $15.5 billion. However, the CAD, which touched a record high of $87.8 billion in the 2012-13 fiscal year, eased to $32.4 billion in 2013-14 after a government crackdown on gold imports.
The country's CAD widened to $16.9 billion in a single quarter, October-December 2018, against $13.7 billion in the same quarter, a year ago, primarily on account of higher trade deficit. CAD and consumer price index (CPI) are very important for measuring a country's currency stability. CAD is a measurement of a country's trade where the value of the goods and services it imports exceeds the value of the products it exports. The current account represents a country's foreign transactions and, like the capital account, is a component of a country's balance of payments (BOP). It is important because the exchange rate, the price of one currency in terms of another, helps to determine a nation's economic health and hence the well-being of all the people residing in it.
All this is to say that the stability of Rupee in the global, as well as domestic market, is very important for India to emerge as a global economic power such as the US, China and Japan. The size of the US economy is $21 trillion, followed by China $14.242 trillion and Japan $5.231 trillion. The population of the US is only 325 million. China's is 1.43 billion as against India's over 1.30 billion. And, Japan's is 126.84 million. There is little point in building excitement around India's overtaking France (population: 67 million) or about to surpass the UK (population: 66 million) in GDP in dollar terms. At the same time, it may also be wrong to oversight India's economic progress in terms of only the international exchange value of its currency.
But, it still has a long way to go to catch up with developed economies such as Japan and Germany unless it is able to sizeably improve its exports and lower imports to narrow the trade gap, make massive expansion of domestic manufacturing to reduce import dependence and maintain a core consumer price index growth below three per cent. By purchasing power parity (PPP), an exercise that seeks to find the 'true' value of a domestic currency vis-à-vis the US dollar, India's current GDP is around $9.45 trillion, and its global rank is third, behind the US and China. The PPP figures are often cited by experts to say that India is economically weightier than many inside and outside the country think. That may only be partly true. The sad part is that highly import-dependent India occupies as low as the 119th position in the world under the per capita ranking in PPP terms. India has to go a long way to become a powerful global economy.
(The views expressed are strictly personal)