Concerns about current account deficit

January 7, 2013

(Any opinions expressed here are those of the author, and not those of Thomson Reuters)

The current account deficit (CAD) which touched 5.4 percent of the GDP is a matter of deep concern. It is well beyond the 3 percent danger mark which was crossed more than 18 months back and caused the rupee to depreciate.

The only solution that the government has been pondering over is to cut import of gold. True, in spite of being one of the poorest nations we have the world’s highest stock of gold.   The appetite for gold has increased recently because gold has been the only asset to earn high returns. This is so in the rest of the world as well, because of the uncertainty created by fears about recession in EU and the U.S. Therefore, it would be difficult to curb import of gold.

Gold was not however the main cause for the escalation in CAD. In the quarter ending September when CAD climbed to 5.4 percent the share of gold in total imports was actually down from 11.6 percent to 8.6 percent. It is the collapse of  goods exports that inflated the trade deficit which could not be made up by exports of services or remittances from Indians resident abroad.

Exports were doing pretty well until March 2012. Inflation did erode the competitiveness of exports; but it was substantially made up by the weaker rupee. Cotton exports were curbed because of political pressure; exports of iron ore from some of the mines were stopped by a Supreme Court Order. Exports of petroleum products slowed down as also of diamonds and other precious stones. The main cause is attributed to recession in developed countries.

That is not quite reflected in the direction of exports. Surprisingly our exports to North America have not dropped but actually increased. So also our exports to West Asia. We have surely been losing in Europe, which is already in recession, and also in ASEAN and China which are progressive economies. These conflicting trends in exports of different products or to different markets need to be understood to take steps to restore export dynamism.

It is true that import of some of the goods, if not gold, helped bloat up the trade deficit. Import of mineral fuels increased because of heavily subsidised consumption, more particularly, of diesel.  Naturally, the share of mineral fuels in total imports rose from 35.3 percent to 37.9 percent.

In spite of the sharp increase in CAD foreign exchange reserves remained more or less in tact because of the financial support from FII and FDI. These sources are not, however, dependable in an environment of uncertainty. It is therefore important to check CAD and for that reason prevent trade deficit from escalating.

There is more to collapse of exports than recession in EU and Japan. Other countries like China or South Korea have been able to win back markets. There is no reason why we cannot. What is necessary is to invest in market development and ease the routes for exports to take place.

 

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