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Rahul Khullar: Look beyond the usual suspects

Rather than high domestic absorption, large budgetary deficits and an overvalued exchange rate, it is domestic policy distortions and inaction to correct them that lead to huge current account deficits

Rahul Khullar

When balance of payments (BoP) difficulties manifest themselves as unsustainable current account deficits (CAD), economists line up the usual suspects: high domestic absorption (excess aggregate demand), large budgetary deficits and an overvalued exchange rate. The remedies are well known; cutbacks in expenditure, reduce public dissaving and devaluation (or depreciation) of the exchange rate. Do we need to look beyond the usual suspects? Most certainly because often it is domestic policy distortions and inaction to correct them that lie behind the large CADs. Addressing such structural ...