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CAD and the emergency thereof

A country runs a Current Account Deficit (CAD) when total value of its import of goods, services and transfers exceed total value of export of goods, ser- vices and transfers, making the country a net debtor.

Today, our foreign exchange reserves are sufficient to pay six to seven months of our import bill.  In 1991, when India unleashed economic reforms, we had reserves to pay  for just a week’s imports. The county cannot risk depleting its reserves further.

 

Declining exports...

The news in June 2013 is not encouraging: industrial production, exports and imports were contracting and consumer price inflation was inching towards to double-digit. That month, exports declined by 4.5 per cent on Y-o-Y basis, and the trade deficit was  $12.5 billion.

The CAD in 2012-13 was 4.8 per cent of GDP, up from 2.3 per cent in 2008-09. The Reserve Bank feels that CAD at 3 per cent is sustainable for the Indian economy. Anything above that could hurt the stability of the country’s external sector. At the current level, the deficit is at its highest since 1990-91.

Import of petroleum products and gold were responsible for 45 per cent of all imports of 2012-13.  While petroleum products imports were $169 billion, gold imports were at  $54 billion. As petroleum products impact every sector of the economy, we can’t prune their imports.  As for gold, despite the government taking several steps to reduce import, it shot up to 160 tonnes in May, threatening to exceed annual imports of 950 tonnes.

 

Steps that will increase exports

The US economy is showing signs of improvement; but EU is still in doldrums; and other countries guard their international trade. In this backdrop, the usual trade policy steps we had taken in the last few decades will be of little help.  Here are a few possible measures.

  • The government could stop import of gold for a year, except for the export of gems and jewelry, and review the situation at the year end. Of course, there will be loud cries of possible increase in smuggling. It is a genuine fear. But customs can increase its efforts and the increased expenditure will be offset by contraband gold seized by customs and auctioned in the open market.
  • Where the terms of trade are disadvantageous to India, we should talk to the country concerned, on how to improve the trade relationship. Take China, for example. With China our exports are only 33.5 per cent of what we import from that country. Already, the new Prime Minister of China,
  • Li Keqiang, has said that he understands our concerns over the trade deficit and has promised greater market access to Indian products. India should strike quick deals on various possibilities.
  • Export credit, as a proportion of total bank credit, declined from 9.3 per cent in 2001 to 3.7 percent in 2012, even though exports grew from around $45 billion in 2000-01 to $300 billion in 2012-13. All commercial banks in India are mandated by RBI to direct 40 per cent of their net bank credit to the ‘priority sector’, which broadly covers agriculture, micro and small enterprises, educational and housing loans. In these, RBI monitors performance closely. Banks strive to achieve the target, and are penalised for shortfalls.
  • Top 100 exporters are responsible for more than 75 per cent of exports. Government should get in touch with them and assist them to increase their exports. The Cabinet Secretary (CS), under the guidance of the Prime Minister, should be made in charge of this task. He should mobilise officers in the government and allot them specific export units to visit and meet the concerned chief executive and the person in charge of exports and discuss their specific issues and give their findings within a week. The committee under the CS should look at the suggestions, and select those, which will contribute to substantial increase in exports. Any such help given to a unit should be with the condition attached, that if they did not fulfill their promise, the extra benefits would  be withdrawn.
  • The retrospective legislation brought in the budget of 2012 had halted the international investing community. A categorical statement by the government that they will not resort to any retrospective legislation in matters of taxation will help.
  • Another aspect, which concerns foreign investors, is the Transfer Pricing policy. It should be possible to get the views of international actuaries. The IT department can announce in advance, how it would calculate ‘transfer pricing’ in different circumstances.

 

Limit disclosure of strategy

China has been the most successful country in increasing its exports. In 1984, India’s exports were about $10 billion and China’s were around $25 billion. In 2007, India exported goods worth $126 billion whereas China’s exports had shot up to  $1218 billion, almost ten times that of India. Of course India cannot take all steps that a totalitarian regime can take with ease, but there are a few things worth attempting.

 

Why politicise the Trade Policy?

First, we declare a ‘Trade Policy’ at the beginning of every year indicating incentives and benefits for the exporter. I have never come across any ‘Trade Policy’ announced by China in the last few decades. We should abandon this practice in toto. The government can convey their policy decisions to export promotion councils or chambers of commerce, who can inform their constituents.

Aspects of governance such as Strategy of Defence, External Affairs and Exports should not be publicised. While the former two should never ever be discussed in public, the latter should be let known only to exporters through Export Promotion Councils, FIEO and Chambers of Commerce. When I was Chairman of Engineering Export Promotion Council, many exporters complained that after the announcement of trade policy, with all minute details, many export customers asked their suppliers for reduction in export prices.

 

Responsible media...

Media has a habit of using the word ‘sops’ for any incentive given even if it were for the return of taxes paid and export credit. In this, the basic premise that you can export a product at a price, which does not include the local taxes, is forgotten. The Oxford Dictionary gives the meaning of the word ‘sop’ as ‘things given or done to pacify or bribe.” Media not only calls it sops, but also gives a figure of few thousand crore as the value of the total benefit, without explaining how it was calculated. I would appeal to the media to be vary of decrying an economic activity essential to the country.

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