When the current account deficit came in at 4.2 per cent of gross domestic product in 2011-12, it went past the three per cent level recorded in 1990-91, and it was generally supposed that the government would prioritise bringing it down to more reasonable levels. However, it seems that both the government and most observers, who were focusing on high gold imports and the vast petroleum products bill – one produced by high demand; the other by the price effects of choked-off supply – failed to see the real problem. Consider the numbers. Last financial year, the trade deficit was $185 billion. The crude oil import bill was around $150 billion; gold imports cost $60 billion. Since then, what has changed? In the 10-month period since April 2012 for which data are available, the trade deficit was already around $170 billion. Gold imports have been controlled slightly by new administrative measures, but oil imports have continued to increase, by 11.5 per cent over the same 10-month period in the previous year. However, the reason that there appears to be little chance of bringing the current account deficit down to a reasonable level – or even avoiding the dangerous five per cent of GDP level – is that, in the meantime, merchandise exports have collapsed.
The export target for this year that the commerce ministry claimed was achievable was $350 billion. Instead, so far, in the April-January period, exports have been $240 billion — nearly five per cent less than they were in the same period in the last financial year. The government has long claimed that part of the reason for the adverse current account deficit came from a collapse of export demand for Indian goods. Engineering exports, for example, declined four per cent in April-January of this financial year as compared to the previous year. It is becoming clear that this was only half the story. The problem was not just reduced demand; it was the inability to ramp up supply, or for the government to enable competitiveness in order to expand the markets for Indian exports. Otherwise, why would exports decline just as the world economy revives, and China’s merchandise exports, for example, are rising?
There are two levels at which the government has failed to support exports, and neither of them has anything to do with the standard subsidise-and-incentivise framework with which export promotion is generally viewed in New Delhi. The first is the basic point that real sector reforms are overdue. Indeed, in order to avoid a crisis – to avoid an obviously unsustainable dependence on imported goods and cheap capital flows, and even dollar-denominated debt – a programme of structural reform is becoming essential. Fix power, labour, ports, roads – otherwise not only will foreign capital stop supporting India’s external account, Indian capital will all vanish overseas.
The second point is that halting the rupee’s depreciation was clearly a mistake. Such depreciation is the only way to restore competitiveness to Indian goods, and the natural control valve for a ballooning current account deficit. Instead, the Reserve Bank of India squandered the opportunities to build up reserves that it might now need to stave off a crisis. If the rupee is cheap enough, then, unlike in early episodes of devaluation, it will be possible for Indian manufacturers to create capacity to expand their global market share. It is essential that the government, in order to avoid a crisis that is looming, take these two steps — since, of course, looser monetary policy with reference to the rupee will be impossible unless fiscal policy is tightened.
