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Solving the CAD conundrum

Notwithstanding paranoia looming over weak external economies of the country, WEF (IMF) forecasted that emerging and developing economies, including China and India, will contribute 60 per cent to the world economic growth during 2010-1018. In other words, India still holds the image of an important wing for world economic growth. At present, the crucial economic woe is widening CAD (current account deficit). It has already crossed the comfort zone of 1.5 per cent to GDP and is reeling under thin hope for ebbing. Unless CAD is squeezed and brought into the comfort zone, paranoia will loom over Rupee strength. According to the former Governor of RBI, D Subbarao, the only solution to Rupee depreciation is to reduce CAD. Theoretically, surge in export should be the immediate solution to reduce the CAD. But, given the global slump, surge in export will be a far cry. EU, which consumes 56 per cent of India’s export, is sagging. USA, which imports 40 per cent of India’s export, is just on the takeoff stage for revival. ASEAN, the emerging export destination, is itself reeling under currency depreciation. Hence, the only and immediate imperative solution to improve CAD is to attract more FDI in the country.

Unfortunately, uneconomic factors were the main drags for widening CAD. Gold import was the sole responsible for widening CAD. Gold import stood at $54 billion in 2012-2013, which alone accounted for 61 per cent of CAD. Minus gold import, CAD would have been little less than two per cent of GDP – a little higher than comfort zone of CAD. To curb the gold import government raised import duty and restricted gold import with riders. But, curbing gold imports is not the panacea. The country needs to shore up the economic factors, which can contribute to reducing the CAD. The country requires more investment to iron out the supply constrains. Domestic investors are shackled by tight monetary policy.

In this perspective, FDI plays an important role to increase investment and capacity building. More FDI flow means more investment in the economy, which will also help strengthening Rupee. With more investment, output will increase and more output means more export surplus and consequently higher GDP growth. Take the case of automobile sector. Today, automobile is the third biggest export item of India. Most of the automobile units have foreign equity participation. Before 1991 reforms, FDI in automobile was restricted. And, automobile was never a major component of India’s exports before the reforms. In the horizon of the sagging economy, there is one silver lining. India has not yet been tainted by the global rating agencies like Standard & Poor’s, Morgan Stanley and others.  Interestingly, exception goes with Japan Credit Rating (JCR), which rated India with BBB+. It means that India has adequate capacity to meet the financial commitment and the country is stable. Will this rating by JCR be a boost to Japanese investment in India?  

In 2012, Japan was the second biggest foreign investor in the world, after USA. It accounted for 9 per cent of world outward foreign investment. India gained prominence in this upward trend in Japan’s global outward FDI. In 2012-2013, Japan emerged the third biggest foreign investor in India from the rank of seventh biggest foreign investor in 2008-2009. However, India’s share in Japan’s global outward investment was paltry. In 2012, it was 2.3 per cent of Japan’s global outward investment. Therefore, enough rooms are left for India to attract Japanese investment. In 2012, China was the biggest recipient of Japanese investment in Asia and second biggest in the world. But, there was a sudden slip in Japanese investment in China. During five months period of January-May 2013, Japanese investment in China dropped by 25.3 per cent (according to Japanese source of statistics). In contrast, Japanese investment in India surged by 34 per cent during the same period. In 2012, Japan was third largest country to make acquisition in India, after USA and UK. Japan made 25 deals of acquisition worth over $1.5 billion. Some key deals were Mitsui Sumitomo – Max New York Life Sciences, Nippon Life Insurance – Reliance Capital, Ostake Pharamaceuticals – Claris Life Science. In 2011, out of 10 top deals of merger & acquisition, Japan made three major acquisitions: JFE Steel Corporation – JSW Steel, Sumitomo Mitsui Banking Corporation – Kotak Mahindra, and, Hitachi Construction Machine – Telco Construction Co Ltd.       

Panasonic Corporation of Japan, which once denigrated India as investment destination, is upbeat to reboot its investment in India. President of India Panasonic Corporation, Daizo Ito, said that India’s growth might have slowed down, but still it was one of the few countries which was growing more than five per cent, making it a focus country for Japanese electronic giant.  

Japanese FDI played significant role in the process of industrialisation in ASEAN. It is more ‘trade oriented’ than USA FDI, according to the economist Trinh D Nguyen in her study report on the, Great Migration. The report analysed that Japanese firms in Asia played significant role in building up production zone as an extension of their domestic base and helped the less developing countries in industrialisation.     

At this point, India should wake up to reduce its red tape and lure the Japanese investors. This will consequently help in reducing CAD. IPA

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