P Chawla
INCREASE in the current account deficit was expected for the third quarter of the financial year 2012-13. The day the RBI had to release its balance of payment data on the evening of March 28, different polls in the stock market were expecting the CAD figure to be above six per cent of the Gross Domestic Product (GDP) . In a way, the market had factored in that India’s CAD would remain high.
But when the RBI finally released the data, it in a way shocked the market and many of the brokerage firms and economists. After all, it was never so bad, not even during the 1991 economic crisis. The CAD touched an all-time high of 6.7 per cent of the GDP reminding all of us that we are importing much more than we are capable of exporting and we are living beyond our means.
First the figures, before we analyse them. CAD widened from 5.4 per cent in Q2 to a record high of 6.7 per cent of GDP in Q3, driven mainly by larger trade deficit.
Merchandise exports did not show any significant growth in Q3 of 2012-13 as compared with a 7.6 per cent growth in Q3 of 2011-12.
Merchandise imports on the contrary registered a growth of 9.4 per cent, spurred largely by oil and gold imports.
As a result, trade deficit widened to USD 59.6 billion in Q3 of 2012-13 from USD 48.6 billion in Q3 of 2011-12 .
As net invisibles moderated, CAD rose by over 61 per cent to USD 32.6 billion (6.7 per cent of GDP) in Q3 of 2012-13 from USD 20.2 billion (4.4 per cent of GDP) in the corresponding quarter, 2011-12.
During April-December 2012, CAD stood at USD 71.7 billion accounting for 5.4 per cent of GDP as against USD 56.5 billion (4.1 per cent of GDP) in the same period of 2011.
These hardcore figures which stare straight in your face tell you a bigger story . The message is clear. We are reaching an unsustainable level of gaps between the overseas inflows and outflows.
The UPA Government likes to compare their performance with that of the NDA. It was during the NDA time that the country was piling up foreign exchange reserves making rupee strong in the process, so much so that there was a demand from exporters to artificially keep the domestic currency weak.
Thanks to some robust performance by our software programmers working day and night in Bangalore, Gurgaon, Pune and Chennai, the gap between the merchandise imports and exports was being bridged. In a way, we seem to have taken it for granted that our service exports would keep growing and help the country’s overall BoP look better.
In so far the Q 3 performance is concerned, it was foreign portfolio investment of USD 8.6 billion from USD 1.8 billion in the same period of 2011-12. But then, net foreign direct investment (FDI) declined to USD 2.5 billion from USD five billion during the third quarter of 2011-12.
It is a matter of common sense that the money pouring in the stock market is considered hot which may fly offshore anytime and the government of the day cannot do anything about it. On the other hand, the FDI which is invested in the real sectors of the economy is much stable and gives a stable character to the country’s balance of payment position.
While the RBI released the data , the government was watching it helplessly. What could it do when it is not able to help and motivate exporters, 40 per cent of whom are in the small scale sector, to go and face the tough call in the global market. You could have empowered them by reducing their transaction costs so that they are able to compete their worthy rivals from China.
Actually, the government was not all that helpless! On the same day when the RBI released the data on CAD, an attempt has been made to clip the wings of the central bank. An expert committee under the aegis of the Finance Ministry has tried to take away the powers of the RBI governor to fix the interest rates.
After all, the Governor D Subbarao has not been obliging the North Block to cut interest rates and has held ground to first rein in inflation before the interest rates could be brought down. But then, an institution which tries to act on its own mind and autonomy , its wings must be clipped. That seems to be the guiding principle of the UPA Government.
