Warnings on the external account: CAD could expand to 2013 levels

The government has repeatedly argued that among its major achievements is moving India out of the “fragile five” economies identified during the “taper tantrum” of the summer of 2013, when India’s current account deficit (CAD), in particular, hit dangerously unsustainable levels. However, the government managed, especially through curbs on gold imports, to bring down the CAD to 1.7 per cent of gross domestic product (GDP) in the full financial year 2013-14, as opposed to 4.8 per cent of GDP in 2012-13. Since then, the CAD has shrunk further, going down to 0.7 per cent of GDP in 2016-17. Yet, in 2017-18, there may be a significant increase in the CAD; it may go up to between 1.6 per cent and 1.8 per cent of GDP, according to various institutional analysts. Even worse, at least one institution has suggested that, depending upon crude oil prices, the 2018-19 CAD might be between 2.4 per cent and 2.9 per cent of GDP.

While, of course, much of the reason for a problematic CAD is the crude oil price - something that is beyond the government’s control - it should also have been clear that something else is going on. India has seen a significant increase in imports over the past year; not all of it is oil-related. Gems and jewellery have also increased. It has been argued that this might be an early sign of capital flight. Overall, the increase in imports was nearly twice as high as that in exports over the past financial year. In the end, however, aside from imposing consumption constraints similar to the limits on gold imports, the government does not have too many levers with which to decrease imports. The same cannot be said about exports. In fact, the growing trade deficit can more accurately be seen as a failure to spur export growth than as a consequence of increasing imports. The years of stable macroeconomic indicators - a gift of cheap oil - were wasted by the government, when they should have been used as an occasion to improve export growth. Exports have remained around or below the $300-billion mark since 2011, even as rival exporting countries like Bangladesh and Vietnam have vastly increased their export revenues. Export growth remained in single digits even in 2017-18, the strongest year for world trade growth since 2011-12.

The only sustainable path to stability on the external account is through a vibrant and globally integrated exports sector. Yet, the government’s approach to this crucial sector has been alternately backward-looking and coercive. When export growth is needed, then sector-specific “packages”, which are little more than a bundle of tax incentives, are pushed out. Yet, the overall tax situation has turned adverse, when even such an improvement in the business environment as the goods and services tax has instead been implemented poorly, causing a crunch in working capital. Much of exporters’ capital continues to be tied up awaiting refunds that are due from the government. If indeed the balance of payments turns adverse, then at least the rupee might fall from its current over-valued levels, rendering exports cheaper. The government must work on a war footing to render other aspects of the exports supply chain competitive. Old-style protectionist- and tariff-based thinking will not work.

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